INSTITUTE AND FACULTY OF ACTUARIES

EXAMINERS’ REPORT
April 2017

Subject SA3 – General Insurance:

Specialist Applications

Introduction

The Examiners’ Report is written by the Principal Examiner with the aim of helping candidates, both
those who are sitting the examination for the first time and using past papers as a revision aid and
also those who have previously failed the subject.

The Examiners are charged by Council with examining the published syllabus. The Examiners have
access to the Core Reading, which is designed to interpret the syllabus, and will generally base
questions around it but are not required to examine the content of Core Reading specifically or
exclusively.

For numerical questions the Examiners’ preferred approach to the solution is reproduced in this
report; other valid approaches are given appropriate credit. For essay-style questions, particularly the
open-ended questions in the later subjects, the report may contain more points than the Examiners
will expect from a solution that scores full marks.

The report is written based on the legislative and regulatory context pertaining to the date that the
examination was set. Candidates should take into account the possibility that circumstances may
have changed if using these reports for revision.

Luke Hatter
Chair of the Board of Examiners
July 2017

 Institute and Faculty of Actuaries

 Subject SA3 (General Insurance Specialist Applications) – April 2017 – Examiners’ Report

A. General comments on the aims of this subject and how it is marked

1. The aim of the General Insurance Specialist Applications subject is to instil in successful
candidates the ability to apply knowledge of the United Kingdom general insurance
environment and the principles of actuarial practice to providers of general insurance in
the United Kingdom.

2. Our expectation of a passing candidate at this stage is that, broadly, they should appear
capable of stepping up to a head of function (pricing / reserving / capital) role at a small-
mid sized organisation or being a senior member of a function team at a larger
organisation. They should demonstrate not only a grasp of the technical aspects of
general insurance actuarial work, but should also have a good sense for products, the
competitive marketplace, regulatory environments and the operational aspects of an
insurance company. They should be able to pull these areas of understanding together to
provide well rounded advice to the users of their services.

3. Consistent with previous examiners’ reports, we would offer candidates two key pieces of
advice – (i) read the question properly and (ii) take the time to actually think about what is
going on. Further to previous reports, we would stress that candidates do not need to get
the majority of the points included in this report in order to pass (there are significantly
more than 100 marks available for the points in this report). Time spent making sure that
you are answering the question that is asked is therefore more valuable than a panicked
rush to put down as many points as possible, regardless of whether they are relevant.

4. On the first issue, candidates should always work on the assumption that the question
wording has been carefully chosen. It is therefore essential to read the question properly.

5. If something is not asked for then candidates will waste valuable time writing answers
that will gain no marks. These broader answers may be a logical next step to the
question and so may be appropriate for candidates to discuss in a professional context.
This is an exam however with a finite number of marks available and so the scope must
necessarily be limited and specifically defined.

6. If a question does specifically mention something, candidates should also assume that
there are definitely marks available for this aspect of the question. During the exam
setting process, any content that is superfluous will have been removed. A clear
implication of that is that if there are numbers provided in the question paper then there
are marks available for comment and consideration of those numbers.

7. Wording of question sections should also be considered in the context of the position
within the overall question. Where new question information is provided between
sections, candidates should recognise that this information is specifically relevant to the
following section or sections. When answering preceding question sections, candidates
should not consider any subsequent information in their answers (although it may cover
similar ground).

8. Various examples from this paper of recurrent failure to read the question are noted
below. On the second issue, candidates should note that SA3 is the key paper at which

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 Subject SA3 (General Insurance Specialist Applications) – April 2017 – Examiners’ Report

we test candidates’ broader thinking. This is generally the final paper before qualifying as
a professional, and we consider a capacity for broader thinking to be one of the best
indicators of a candidate’s suitability to act in a professional capacity once qualified.

9. As such we aim to design exam papers so that it is difficult to pass without displaying
some capacity for independent and broad thinking, as well as to heavily reward instances
where these skills are displayed. When reviewing past papers, candidates should
assume that the marks available for generic points are substantially less than those
awarded for the more challenging points that would be the mark of high quality
professional insight in a practising actuary. Marks available for list items from bookwork
are lower still.

10. We strongly recommend that candidates step back and take the time to thoroughly think
about what is actually going on in question situations proposed rather than simply
considering numbers to be analysed with standard techniques. For example, candidates
might stop to think about what claims actually are for a particular class of business,
considering factors such as what actually causes the claim, who brings the claim, how it
is dealt with once brought, what makes one claim small while another is substantial etc.

11. This more grounded, real world perspective will help candidates to consider such things
as practical issues, stakeholders involved and their potentially diverging objectives, wider
impacts, regulatory or ethical issues, inappropriateness of certain actuarial techniques for
the specific situation, current economic or cyclical effects etc. This is likely to lead to
significantly broader point generation (and indeed reflects the thought processes of the
examiners in drafting the questions and solutions) and a more rounded understanding of
the underlying risks and dynamics which should also be of value to candidates when
dealing with different stakeholders in their professional life.

12. Again, some examples of this failure to think more widely on the current paper are below.
More generally, we would also advise candidates to employ basic exam techniques such
as well structured answers and effective time management.

B. General comments on student performance in this diet of the

examination

The pass mark and pass rate are broadly consistent with recent papers. The majority of
candidates scored well on bookwork orientated elements which did little to distinguish
between any candidates that were close to the passmark. There was some evidence of
improvement in candidates being able to do original thinking where required for a question,
although some sections were a struggle. There were fewer instances of misunderstanding
the question, which may reflect either improved candidate performance or the outcome of
continued efforts by the setting team to make the questions as unambiguous as possible.

1. Part (i) was bookwork almost universally well answered. Part (ii) was reasonably well
answered with candidates showing some ability to tie their answers to the specifics of the
question. Part (iii) was weaker with a number of candidates failing to stick to the
question.

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 Subject SA3 (General Insurance Specialist Applications) – April 2017 – Examiners’ Report

2. This was generally the least well answered question. Candidates are clearly more used
to thinking of loss performance issues rather than conduct issues, and struggled to
address operational issues / sales processes / delegation of authority etc.

3. Well answered, with candidates showing some good original thinking about an unusual
product design. Strangely, once the question moved back into more familiar territory of
considering reserving issues for an unusual product the quality dropped.

C. Pas Mark

The Pass Mark for this exam was 58

Solutions

Q1 (i) Number of people covered – the more people covered the more claims would
be expected (i.e. it’s an exposure measure) [1]
Ages of people covered – expect likelihood/frequency of medical treatment to
increase with age [1]
Number of times have used ambulance in past year/number of years – may be
a good predictor of future ambulance need and/or an underlying medical
condition [1]
Address – linked to the likely distance of ambulance transport required, which
is in turn linked to cost [1]
Pre-existing medical conditions – may be a good predictors of future
ambulance need
Sales/Payment method – may be lower admin costs if buy online/pay annually
etc. [1]
Excess – if customer is prepared to pay part of claims cost, reduces average
cost, and may indicate lower expected frequency [1]
Sex – there may be statistics which show differences in utilisation of
ambulance by sex [1]
Occupation / past times – some jobs/hobbies may be more likely to result in
injury, and so require an ambulance [1]

Credit for other valid examples / reasons  2 [1]

[Max 6]

(ii) Premium needs to cover expected claim costs [1]

An approximate claim cost estimate would be = 10% * $500 m = $50m [1]
This estimate assumes the government has accurately estimated total
ambulance fees for the country [1]
- The government should know the total national utilisation of ambulance
services at present [½]
- Government may not have appropriately allowed for changes in utilisation
due to increases in fees (i.e. some people choosing not to use ambulances due
to the cost) [½]
Other valid challenge to base figure [½]
Other valid challenge to base figure [½]

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Subject SA3 (General Insurance Specialist Applications) – April 2017 – Examiners’ Report

Relativity of city to overall

Need to consider whether city population have higher or lower than average
ambulance costs [1]
It may be possible to obtain accurate ambulance usage statistics for the city to
refine this estimate [½]
For example, understanding the number of ambulances based in the city and
the distance travelled by each ambulance each year [½]
Alternatively may be able to estimate this information, for example, talk to /
survey/ monitor ambulance drivers, contact garage which maintains city
ambulances, etc. [½]
Consider demographic statistics on the city and how these vary to national
average. [½]
For example, if city population is younger than national average, likely to have
lower than average claim costs [½]
(or other relevant investigation to understand likely costs) [½]
Fee varies by distance – and the mayor will only cover transport in city, so
distance may be less than the national average [1]
May regularly be at minimum [1]
Insurance only covers resident population – residents will spend some time
outside city (e.g. on holiday), and people on holiday in the city are not
covered. [1]
Any potential liability exposure to poor ambulance service provision [1]
Accumulations [½]
. . . Sensible accumulation example [½]

Other components of premium

Premium needs to be sufficient to also cover insurer’s expenses [1]
But the mayor’s staff will do the claims administration and settle claims in
bulk each month [½]
Need to know mayor has appropriate procedures in place to limit claims to
only those who are eligible (live in city, travel within city) [½]
Expenses are therefore not expected to be material [½]
Need to allow for the net cost of reinsurance [½]
- However the insurer may not need any reinsurance given the nature of the
risk, for example, there is limited large loss/catastrophe exposure [½]
- If the total exposure to the risk is too high, consider quota share / coinsurance
model – where premiums and claims are shared in the same proportions [½]
Consider insurance premium tax [½]
Premium should cover insurer’s cost of capital / profit margin [½]
However the business should be capital light, so the percentage loading for
profit should be quite small [½]
This is because claims are reported and paid quickly – there will be no
material outstanding claim balances, and the final profitability of the business
will be quickly known [½]
Investment income [½]
. . . Minor as short tail [½]
. . .. Timing of payments will impact [½]

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 Subject SA3 (General Insurance Specialist Applications) – April 2017 – Examiners’ Report

Other factors / opinion

Consider relationship with government/mayor [1]
There may be reputational reasons for writing / not writing this high profile
account [½]
Other benefits of underwriting significant account [½]
Consider the motivations for the mayor in looking for insurance, rather than
simply paying claims? [½]
We don’t have enough information to be certain about the adequacy of the
indicated premium [½]
On balance – perhaps reasonable to expect claims less than 10% of national
total or $50 m, given only cover people who live in city for city journeys [½]
Other components of premium such as expenses do not appear material [½]
Subject to all the investigations described above, seems reasonable that $65 m
might be enough to write the business [½]
[points available for alternative conclusion with appropriate reasons] [1]
[Max 9]

(iii) General observations

Given the statistics, the average claim cost per person appears to be $50 per
year (=$500 m total expected fees / 10 million) [½]
Even with loadings for expenses, profit margin etc., its likely the average cost
of insurance will be far less than $300 per person per year [½]
However some people may have expected claim costs in excess of $300 per
year [½]
For example, if there is a frequent need for ambulance treatment and/or the
cost of ambulance transport is high (due to distance from hospital) [½]
Ordinarily insurers will set premiums based on expected claim costs, meaning
some premiums will exceed the $300 government target [½]
Insurers would expect to make a loss on some policyholders (where expected
claim costs are high) [½]
Insurers may still be prepared to offer the insurance if they expected the
product to be profitable overall [½]
The product would only be viable for the insurance industry if large numbers
of people with low expected claim costs purchase the product, so profits on
this group offset losses on customers with expected claim costs above $300
[½]
Individual insurers would need to market their products to avoid attracting a
higher than average proportion of loss making business [½]
Because healthy people will be charged far more than the premium based on
expected claim costs, they may not buy the product [½]
If only people with very high expected claim costs buy the product, the
premium will need to be very high, and/or insurers may make a loss [½]

Government actions
Government could simply regulate the premiums, requiring that no premium is
above $300 [½]
Government would also have to require that insurers to not decline to insure
people who want to be covered, even if the expected claim costs are in excess
of $300 [½]

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Subject SA3 (General Insurance Specialist Applications) – April 2017 – Examiners’ Report

Government could mandate a formal risk sharing arrangement / pooling

arrangement, where insurers share the cost of customers with high expected
claim costs [½]
Alternatively government require that all people are charged the same
premium, regardless of expected claim costs (community rating) [½]
This would ensure premiums are set above the “market” premium for low
risks customers, providing a source of profit to offset loss making customers
where expected claim costs exceed the premium [½]
Government could require everyone to insure (compulsory insurance), which
would ensure premiums are similar to the expected claim costs ($50 per year)
and much lower than $300 per year [½]
Set up own captive [½]
Government could pay a premium subsidy to reduce premiums below $300
[½]
Alternatively government could provide a claim cost rebate / subsidy to
insurers [½]
Government could provide free cover to risks with highest expected claim
costs [½]
- These options would involve expense to government – fee may be being
introduced to reduce expenses [½]
- Subsidies may reduce efficiency, by reducing the incentive for insurers to
keep rates low once they exceed $300 [½]
Part of the purpose of the initiative may be to discourage use of ambulances
[½]
It also removes incentives for the insurers to reduce demand for ambulances,
for example, but helping frequent ambulance users stay well and out of
hospital [½]
Government could change the ambulance fee structure [½]
for example, charge a higher amount per km but have a fixed annual cap for
all ambulance use [½]
or a lower maximum fee per journey [½]
Fines for misuse [½]
Other mitigation suggestion [½]
Allow insurers to provide a more basic product which costs less than $300 [½]
By having a fixed annual limit [½]
By including a co-payment / excess [½]
However this may mean the product is not fit for purpose – no point having
cheap premium product if policyholders have material out of pocket cost [½]
Providing better data provides insurers more confidence around rating – lets
people reduce rates for some customers perhaps [½]
Reduce insurance premium tax [½]
[Max 10]
[Total Max 25]

Part (i) Almost everyone scored full marks on this section.

Part (ii) Reasonably well answered, candidates almost universally made

some commentary about the other components of premium (the

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 Subject SA3 (General Insurance Specialist Applications) – April 2017 – Examiners’ Report

most generic part of the answer) and the majority gave some
consideration to relativities between the city and the overall
population.

Part (iii) Relatively poorly answered. A number of candidates showed a

limited grasp of the skewness of health outcomes, suggesting that
premiums over $300 were unlikely to be an issue because of the
low average cost. It was also common for candidates to not focus
on the core of the question (i.e. actions the government might take)
and a number did not focus adequately on the aims that all could
get insurance within that price.

Q2 (i) Reinsurers [½]

likely to be the most sophisticated policyholders with most data & knowledge
[½]
with complex modelling capability and legal teams to test product is suitable.
[½]
Insurer/managing agent / mutual [½]
as professionals in the insurance area likely to have knowledge to assess
products [½]
some very small insurers, particularly in emerging markets may have less
knowledge. [½]
Multi-national corporation [½]
likely to have significant resources to hire in-house insurance specialists [½]
or external legal/consultancy advice so likely to be a sophisticated consumer.
[½]
Large company [½]
likely to have resources to seek independent advice, e.g. corporate broker. [½]
Small business/micro enterprise [½]
likely to need more protection to ensure products are suitable as will lack
resources to carry out independent investigation. [½]
Government / local authority [½]
Likely to be similar to a large company [½]
Charity / affinity group [½]
Likely to be less sophisticated for same size than a commercial entity [½]
Individual advised by broker [½]
if the consumer receives independent third party advise it will lower the
conduct risk [½]
would not necessarily apply if the broker was tied so acting as agent of
insurer. [½]
Individual [½]
unlikely to have insurance expertise so extra care in ensuring products are
appropriate. [½]
Vulnerable individuals [½]
are likely to need the most extensive support from conduct risk regulations [½]
examples may include the elderly or those with learning disabilities. [½]
[Max 9]

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Subject SA3 (General Insurance Specialist Applications) – April 2017 – Examiners’ Report

(ii) (a) Design

Intended distribution channel.. [1]
sold via internet price comparison site more risky as can't provide
personalised advice. [½]
Complexity of the product [½]
e.g. if it requires customer to select from many optional features. [½]
New designs may be more risky as customers will be unfamiliar. [½]
Complexity & comparability [½]
Add-on vs standalone [1]
Especially if no clear alternatives [½]
Ensure that the product design meets customer needs.. [1]
including appropriate excess / sum insured [½]
should be a realistic prospect of customer being able to make a claim.
[½]
Could use customer input in the design process e.g. testing different
designs on focus groups. [½]
Cover should not already generally provided by another product. [½]
Ensure that changes to existing products are subject to review for
possible adverse impacts on customers. [½]

(b) Pricing
Should not be unreasonably profitable [1]
Price should be fair for each customer – “cross subsidies” where other
customers pay more to cover losses from a particular group of
customers should be avoided [1]
Avoid unfair rating methods such as “inertia pricing” for those that
don't shop around. [½]
or discriminatory factors such as race or gender. [½]
Charges (e.g. for policy amendment) should be commensurate with
actual costs. [½]
Commission levels such be reasonable compared to premium charged /
work involved [1]
Incentives should not wrongly motivate staff [1]
Prices should be clear, [½]
particularly when offering an add-on cover to another product. [½]
. . And increases should be clear & reasonable at renewal [½]
Prices quoted to customers should include all taxes and other charges.
[½]
Care should be taken when pricing a product that has optional elements
[½]
e.g. pricing structure encourage customers to miss key parts of the
cover to lower price, thereby making product practically useless. [½]

(c) Wording

Policy wordings should be in clear, accessible language that would be

expected to be understood by the intended policyholder. [1]
A policy summary should be provided alongside the full terms. [½]
Details of how to cancel or amend policy [½]
and costs of doing so should be provided. [½]

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 Subject SA3 (General Insurance Specialist Applications) – April 2017 – Examiners’ Report

. . . Should not be overly onerous to cancel / amend [½]

Cooling off period [½]
Key facts should be provided [½]
Good definitions [½]
Explicit service levels [½]
Procedures for making a claim should be clearly laid out. [1]
and these should not be unduly difficult for customer. [½]
no unfair restrictions on repair firms [½]
No unfair terms such as unreasonably low limits of liability should be
included. [½]
Exclusions should be listed explicitly, with examples if necessary. [1]
Details of the insurer include contact details should be set out in the
policy.. [½]
avoiding methods like premium rate phone lines that discourage
customer contact. [½]
Complaints procedure should be described clearly.. [1]
including escalation to regulator/independent bodies if not happy with
the company response. [½]
[Max 12]

(iii) Some sort of information dashboard or summary that is prepared on a monthly

basis and covers key numerical data. [1]
Particular metrics can include:
Claims data such as time taken to settle a claim, number of re-opened claims,
number of rejected claims. [1]
Number of complaints by product line segmented by the type of complaint
(e.g. claims settlement, misleading wordings). [1]
Any complaints referred to regulator and their outcomes. [½]
Information on policy cancellations or non-renewals. [½]
Outcomes of new product reviews. [½]
Low loss ratio products [½]
High commission products [½]
Overall portfolio commission [½]
Fines / sanctions [½]
Mystery shopping outcomes [½]
Re-opened / renewed [½]
Other reasonable suggestions [½]
Other reasonable suggestions [1]
Regular results of staff surveys or web based learning identifying awareness of
conduct risk issues in front line workforce. [1]
Customer feedback including satisfaction scores from different aspects of
consumer experience (e.g. claims handling) or focus group output. [1]
Results of internal audits/external consultant reviews should be made available
to the Board as quickly as possible after conclusion. [1]
Any formal regulator review or feedback should be presented to senior
management and then the Board, together with recommendations for
improvements required. [1]
More granular information required for the operational management [½]
than the Board which is more interested in strategic issues. [½]
MS11 evidence templates [½]

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Subject SA3 (General Insurance Specialist Applications) – April 2017 – Examiners’ Report

Actuarial function report [½]

ORSA / model outputs [½]
Will need to ensure that data is available to satisfy external reporting
requirements.. [½]
such as to national regulator or auditors. [½]
[Max 8]

(iv) Key issue is that certain functions are undertaken on behalf of the insurer and
these may not be performed up to the required standard by delegated authority.
[1]
Inadequate data systems at coverholders mean that insufficient management
information on conduct risk issues can be produced. [1]
Poor claims handling [½]
including unreasonable delays [½]
or attempting to reject legitimate claims to increase profit. [½]
Employees may be insufficiently skilled or acting inappropriately [½]
Employee incentives could encourage poor behaviour (i.e. volume based
incentives only) [½]
Sales techniques inappropriate (e.g. cold calling) [½]
leading to products sold inappropriate for customers needs. [½]
Unreasonable charges for policy changes [½]
Failure to address customer complaints [½]
(or do so in a timely manner). [½]
Unclear or misleading policy wordings if insufficient control / review [1]
[Max 4]

(v) Certain aspects could be taken back “in house” by the insurer, until
performance improves, [1]
e.g. complaints handling. [1]
Conduct risk assessments undertaken by insurer before using each delegated
authority.. [½]
require remedial action to be taken before business is written. [½]
Policy wordings to be pre-approved by insurer prior to sale. [½]
Minimum standards for treating customers fairly should be written into
delegated authority agreements. [½]
Valid example [½]
Valid example [½]
with penalties if these are not achieved [½]
or incentives based on customer satisfaction measures. [½]
Restrict authority [½]
Valid example [½]
Regular audits should be undertaken by insurer to ensure that standards are
appropriate. [½]
level of scrutiny could depend on size or complexity of the product. [½]
Insurer carries out customer satisfaction surveys/focus groups with delegated
authority policyholders to identify issues. [½]
Ensure that all delegated authority staff have received appropriate training. [½]
Mandate that set scripts are used in sales interactions with customers. [½]

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 Subject SA3 (General Insurance Specialist Applications) – April 2017 – Examiners’ Report

Embed conduct risk objectives in job descriptions and appraisal process. [½]
[Max 4]
[Total Max 37]

Part (i) Overall well enough answered. A number of candidates proposed

some odd segmentation of individuals, thinking that insurers would
identify accountants or actuaries with high financial sophistication
and yet failing to identify that broker / IFA advised individuals have
a very different risk profile.

Part (ii) Majority of candidates made some reasonable points on policy

wording aspects, but struggled more particularly with overall design
issues.

Part (iii) Quite badly answered. A number of candidates went completely off
topic and didn’t focus on reporting as the question asked. It was
also common for candidates to talk about reporting more
appropriate for loss performance management rather than for
conduct issue identification. A number of candidates seemed to
grasp the focus of the question without mentioning complaint data
at all.

Part (iv) Most candidates picked up a couple of points but few picked up all
four marks in spite of the number of points available. This should
have been easy enough to generate points for – think about what a
delegated authority might do for an insurer, then think of what could
go wrong with it (indeed there were marks just for stating that they
could do something wrong).

Part (v) Again most candidates got some points but few generated a broad
enough range to pick up four full marks.

Q3 (i) Lack of understanding of risk leading to financial loss… [1]

insufficient or inappropriate rating factors leading to selection [½]
loose policy wording providing additional coverage [½]
insufficient data to adequately assess claims [½]
Take up rates not as expected… [1]
too low so sales do not cover fixed costs [½]
too high so writing outside of plans or suggesting mis-pricing [½]
slow to market so lose first mover advantage [½]
inadequate understanding of requirements of customer needs [½]
Insufficient testing of systems / controls prior to product launch… [1]
IT system failure leading to brand damage or loss of policyholders [½]
website failure displaying incorrect prices could cause regulatory fines [½]
claims information not captured as expected [½]
testing in staging rather than live environment [½]
poor functionality for customers [½]

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Subject SA3 (General Insurance Specialist Applications) – April 2017 – Examiners’ Report

insufficient or out of date management information [½]

Other various:
Competition [½]
Regulatory / licensing [½]
Reputational [½]
Liquidity / phasing [½]
Generic risk e.g. credit market operational [½]
Generic risk e.g. credit market operational [½]
[Max 6]

(ii) As this is a small company introducing a new product they may lack the
required product knowledge and expertise… [½]
and data to price the product [½]
Other generic small company comment [½]
Other generic small company comment [½]
It could expose the company to moral hazards if the celebrity is less risk
adverse after purchasing the insurance [1]
e.g. if the celebrity feels protected against the financial consequences of
reputational damage and behaves more carelessly [½]
or possibly enjoys the notoriety gained from bad behaviour and seek to
damage their reputation once free from the financial consequences of their
actions. [½]
There are fraud risks such as the celebrity deliberately damaging their
reputation so as to benefit financially from a claim [1]
e.g. if they fear their earning capacity is about to reduce. [½]
The company may be exposed to anti-selection if the celebrity has secret vices
and predilections which they do not disclose [1]
which may be hard to prove as material non disclosures after an insured event
has occurred. [1]
The insurance company might damage its own reputation if it is seen to
reward the celebrity’s bad behaviour [1]
particularly risky if the behaviour is illegal or morally repugnant e.g. murder,
drug dealing. [½]
If the policy is sold on a claims made basis the celerity purchase insurance
knowing there is a high or immediate risk of exposure for a past act. [1]
If the policy is sold on a loss occurring basis it may be difficult to determine
the date of loss [1]
particularly if the celebrity’s downfall has occurred through a series of minor
bad acts or the event which caused reputational damage was small relative to
past acts but a tipping point was reached. [1]
There is a risk of costly legal disputes around whether an insurance event has
occurred as it may be difficult to clearly define reputational damage [1]
bad behaviour may be tolerated for some celebrities and not for others e.g.
drug taking by rappers versus football players. [1]
some celebrities can recover quickly from a scandal whereas for others it is
career ending [1]
many celebrities are subject to negative publicity and rumours from time to
time particularly through the internet and social media making it difficult to
determine which if any of these constitute actual reputational damage. [1]

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 Subject SA3 (General Insurance Specialist Applications) – April 2017 – Examiners’ Report

Similar legal risk arises around establishing the financial impact of

reputational damage if the policy is sold on an indemnity basis [1]
celebrity income can be volatile and prone to sudden and extreme directional
changes [1]
reputational damage may have little impact on earning ability and might even
increase it in some cases [1]
if a celebrity is falling out of favour with the public at the same time as a
reputational scandal it may be difficult to separate these impacts on earnings.
[1]
[Max 8]

(iii) Risk and rating factors:

Exposure information [½]
estimation of cost of campaign [½]
endorsements [½]
product recall [½]
and PR consultant in current campaign [½]
Per campaign or annual? [½]
If annual number / type [½]
Risk factors
history of brand damage during previous marketing campaigns [½]
Size of deductible (if any)… [½]
deductible will also ensure company works to mitigates risk [½]
Type of product being endorsed… [1]
likely impact of brand damage linked to nature of product [1]
e.g. health food advertised by athlete who is picked up for doping [½]
existing penetration of product, e.g. start-up might be more adversely
impacted than a well-established product [½]
Nature of marketing campaign… [1]
country specific or global campaign will impact penetration and scale of
limitation exercise and damage [½]
use of endorsement (e.g. television, posters, online, directly on product etc.)
[½]
length of campaign will indicate timescale of coverage and size of potential
loss [1]
Nature of company providing the product… [½]
company with good risk management and procurement teams may be less
risky than new start up with less established procedures [½]
Territorial restrictions [½]
Size of company [½]
Nature of celebrity endorsing the product… [1]
type of celebrity may give an indication of lifestyle choices (e.g. athlete vs
rock star vs reality TV star) [½]
perceived fame of celebrity will impact penetration and scale of any adverse
damage [½]
history of negative publicity will impact likelihood of claim [½]
nationality / gender may give indication of lifestyle choices… [½]
however may be precluded as direct rating factors [½]

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Subject SA3 (General Insurance Specialist Applications) – April 2017 – Examiners’ Report

Information requested on proposal form:

Information used to assess factors listed above (or proxy factors where
necessary) [1]
Company Details – Location, Size, Start-up date, number of employees,
turnover (by location), subsidiaries, expected strategic changes during course
of cover, history of damage during previous campaigns etc. [1]
Product Details –Type, Current Penetration (sales information by location),
projected impact of campaign (sales information by location), cost of
campaign, endorsements, conditions for recall etc. [1]
Celebrity Details – Occupation, Marital status, previous work with company,
other campaigns/endorsements, adverse media history (publically available)
etc. [1]
Additional Coverage Details – length of campaign/cover, type of campaign
(TV, Media etc.), contract details with celebrity (e.g. T&Cs), Deductible etc.
[1]
Should be clear [½]
Not onerous to produce [½]
Not unreasonable to expect company to know [½]
Not unreasonably intrusive / confidential [½]
Should recognise that can do own research on a celebrity [1]
Any historic campaigns potentially in scope under claims made [1]

Policy Wording:
Wording should clearly outline the coverage of the contract… [1]
listing the specific cost of the marketing campaign and endorsements as well
as the celebrity being used [½]
PR expert should be named to avoid ambiguity [½]
Definition of “tarnish” should be agreed… [1]
as well as the threshold above which this would impact the campaign as
otherwise even a small infraction could result in the full cost of the campaign /
endorsement being payable [½]
Limits of cover should be clearly outlined… [1]
such as time limits for cover (timing of any breach should be clearly
articulated so issues occurring outside of coverage period are excluded) [½]
Scope of recall defined [½]
RDI / notification clauses [½]
Underwriting of celeb on annual contracts [½]
such as time limits for cover (timing of any breach should be clearly
articulated so issues occurring outside of coverage period are excluded) [½]
such as time limits for cover (timing of any breach should be clearly
articulated so issues occurring outside of coverage period are excluded) [½]
such as time limits for cover (timing of any breach should be clearly
articulated so issues occurring outside of coverage period are excluded) [½]
Exclusions should be identified… [1]
such as knock on impacts on company’s other products rather than just the
product being advertised [½]
or the used of certain types of celebrity (e.g. those with criminal convictions)
[½]
[Max 12]

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 Subject SA3 (General Insurance Specialist Applications) – April 2017 – Examiners’ Report

(iv) The claim frequency should be low as the number of instances of this type of
event is low compared to the number of celebrities [1]
and this will be reduced further as companies seek to select celebrity role
models who lifestyle and values is consistent with their brand image they wish
to communicate. [½]
Potential losses will tend to be reported quickly as the insured company seeks
to limit the potential damage to its own products and reputation arising from a
emerging celebrity scandal [1]
as reporting the event as soon as possible enables the public relations company
to start taking actions to mitigate the impact... [½]
and the nature of the insured event is such that the company may learn of the
incident at the same time as the insured. [½]
There is no mention of limit or deductibles so it is assumed that the policy
meets the full cost of the loss... [½]
but as the public relations firm is provided by the insurer this provides an
opportunity to limit costs by agreeing a cost schedule in advance or fixed
package prices... [½]
and the costs of the marketing campaign will have an upper limit equal to the
cost expended… [½]
the cost and risk of product recall can also be mitigated by placing a limit on
the form of the celebrity endorsement [½]
e.g. allow picture of celebrity on posters and shelving but not on the product
packaging itself. [½]
There may be a trade-off between the cost of the public relations component
and other costs… [½]
as increased expenditure on public relations may limit the financial damage
arising from the event though this will depend on the particulars of the
individual case. [½]
There may be potential for subrogation if the insurer can sue the celebrity or
recover the fees paid to them. [½]
Mixture of lump sum and phased across the three types [½]
Other valid comment on the three different elements [½]
Other valid comment on the three different elements [½]
Event delay [½]
Accumulations - appropriate comment (e.g. across multiple campaigns) [½]
Volatility [½]
Reinsurance [½]
Disputes / fraud [½]
Claims handling expenses / legal fees high [½]
Multi currency [½]
May be number of nil claims as claims made [½]
[Max 6]

(v) Data
As this is a new product there will be no historic loss development data to use
in estimating reserves on new business. [½]
Few claims so no pricing feedback [½]
all very unique claims so will need claims input [½]
Lot of public domain info [½]

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Subject SA3 (General Insurance Specialist Applications) – April 2017 – Examiners’ Report

A small company may not have suitable data for similar types of products
which it can use as a proxy. [½]
It is an unusual product so there may not be many alternative data sources e.g.
industry bodies, reinsurers. [½]
It may be possible however, to get a rough idea of frequency and average costs
from public domain information due to the public surrounding events. [½]
The underwriters may be able to provide access to the data they used to price
the product though it may be that they initial price is determined on subjective
factors [½]

Reserving methodology
Statistical methods highly unlikely to be appropriate [1]
Almost certainly will be aware of any events that have occurred as will be
public knowledge [½]
Claims should be able to assist with a view on cost impact of known events
[½]
A large part will be reimbursement of the costs of campaign that are fixed [½]
Earning pattern would be built bottom up based on notification date / inception
date / expiry date [½]
Plan / pricing view could drive unearned assumptions unless there is a material
reason to challenge these based on experience to date [½]

Balance
Given the short likely reporting delays and the publicity surrounds an event
there would be minimal IBNR (or technically none as claims made) [½]
The unexpired risk reserve will be high in the first year as the new policies
written during the year will have higher portions of unearned risk the later
they are written… [½]
Unearned balance may be higher still if growing over course of the year [½]
and there is no unearned risk being brought forward from the prior accounting
period to offset the unearned risk being carried forward. [½]
or much greater than any of the other reserve components [½]
or somewhere in between, e.g. only a small element of public relations costs
on a claim were incurred. [½]
Some nil claim notifications may be held as IBNR [½]
Appropriate comment on the three components [½]
Appropriate comment on the three components [½]
Appropriate comment on the three components [½]
[Max 6]
[Total Max 38]

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 Subject SA3 (General Insurance Specialist Applications) – April 2017 – Examiners’ Report

Part (i) Generic bookwork, most scored fairly well but some went off topic
talking about risks after launch.

Part (ii) Candidates generally did quite well generating some original ideas
thinking about a completely unconventional product. Main
weaknesses were confusion about the differences between moral
hazard, fraud and anti-selection with some candidates using these
terms inappropriately (even though the issues they were
considering were relevant).

Part (iii) Candidates again did relatively well on this question even though it
required entirely original thinking about an unconventional product.

Part (iv) A number of candidates had quite a limited focus and didn’t really
consider much more than frequency, severity and reporting /
settlement delay. Very few candidates considered the three
components of coverage and their different profiles.

Part (v) Poorly answered. In the data section a number just listed out
standard data items rather than tying them to the reserving
exercise or thinking at all about the unusual nature of the product.
In the reserving approach, many went through a very generic
process rather than stopping to think about the specifics of the
product and a pragmatic approach. Many candidates wrote almost
nothing for the balance section or gave up quickly, perhaps due to
time management issues at the end of the paper.

END OF EXAMINERS’ REPORT

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