Question 1

You are the Operations Manager for NL Ltd, a medium-sized insurance broker, that
specialise in commercial risks.

NL Ltd plans to remain an independent insurance broker, but is experiencing difficulties

competing in the insurance market in which it operates. It recognises these difficulties could
be addressed by growing its business and becoming more efficient, through the wider use of
technological capabilities.

The Board of NL Ltd has therefore decided the acquisition of another insurance broker, that
is already successfully harnessing the use of technological capabilities, will be the most
appropriate way to grow its business.

A) Identify, with justification, three significant advantages for NL Ltd if it grows, by the
acquisition of another insurance broker. (6)
B) Explain, with justification, one significant action NL Ltd could take to maximise the
technological capabilities it will obtain, through the acquisition of another insurance
broker. (4)

Answer

A) There are several advantages to NL Ltd if they decide to grow via the route of an
acquisition of another broker and some of these are listed as follows;

(i) One of the main advantages for NL Ltd would be the potential to rapidly grow
their own book of business by acquiring that of another insurance broker.
Generally speaking, NL Ltd may want to target a company that already has a
thriving book of business as this could potentially provide the best return on their
investment.

(ii) Secondly, NL Ltd may benefit from an acquisition by obtaining new distribution
channels and giving them a better penetration of areas within the market which
they are not currently accessing. For example, NL Ltd currently specialise in
commercial risks, however if they were to obtain a personal lines broker that
specialises in home and motor risks, there is a huge possibility of them cross
selling to their current customer base.

(iii) Lastly, another advantage to NL Ltd would be the potential of obtaining lower unit
rates from insurers due to the increased volume of a particular type of business
that can be placed with an insurer. Furthermore, if NL Ltd obtained a broker that
had a specialist product, for example high net worth home insurance, there may
be an opportunity to negotiate a delegated authority scheme from an insurer and
thus request an increase in commission due to removed administration costs for
the insurance company.

B) Should NL Ltd obtain a broker that has an advanced I.T system in comparison to
their own, there is the opportunity to use this I.T system throughout the rest of the
business and subsequently enhance staff productivity and increase sales.

Furthermore, as the acquired staff would already have the working experience of the
more advanced I.T system, they could potentially assist other members of the
 business and reduce the extra cost of outsourcing the training to a third party
provider.

In conclusion, the acquiring of an advanced I.T system could boost staff productivity
by removing unnecessary boundaries, also it may allow access to other product lines
and improve admin efficiency across the company.

Question 2

You are the newly appointed Managing Director of KR Ltd, an insurer that underwrites a
wide range of personal and commercial insurance products.

KR Ltd.’s previous Managing Director left six months ago, at a time when agile working was
being introduced. Subsequently, KR Ltd lacked senior leadership direction, which resulted in
managers and employees being inconsistent in their day-to-day decision making.

Adherence to agreed processes has not been consistently met, as defined in KR Ltd.’s
internal service standards. This has resulted in a varied customer experience for its
policyholders and criticism from its panel of insurance brokers. These brokers have also
complained about KR Ltd.’s missed deadlines and poor record keeping.

Feedback from KR Ltd.’s newer members of staff shows they lack direction in their personal
development and feel isolated, due to the agile working environment.

You are considering these operational issues.

A) Identify, with justification, an appropriate management style you should introduce to

KR Ltd. (2)
B) Explain briefly, three significant actions you would take to improve KR Ltd.’s
operational issues. (9)
C) Explain briefly, one key management skill you should use to deliver each of the three
significant actions, you have explained in (b) above. (9)

Answer

A) In this scenario, it would be important to first understand what issues are currently
present within the business. It is clear that there is a clear lack of leadership and
direction within KR Ltd. It is also noted that they are consistently missing their
deadlines and have poor record keeping, which has led to criticism and complaints
from both their panel of insurance brokers and customers alike.

Given the current situation at KR Ltd, it is apparent that they are in need of a
management style where decisions are made promptly and they are consistent.
There should also be strict processes put in place and plans to ensure that these are
adhered to.

The best suited style of management in this case would be the militaristic style of
management (CII study text, M92 Insurance Business and Finance 23/24), which
would mean that decisions are made quickly and structure would be in place to
ensure deadlines are hit and processes are followed in a uniform way. It must be
noted however, that this may cause an issue in relation to staff morale.

B) KR Ltd clearly have several issues within their organisation at present, however the
three most relevant are stated below.
(i) There has been feedback from newer staff within the organisation that there is a
lack of direction in their personal development and they feel isolated due to the
agile working environment.

To combat this, there should be a clear training plan and career progression plan
put in place, which has been discussed and agreed with the staff member to
outline their training and development requirements. Normally, this would involve
a range of Key Performance Indicators and SMART objectives (CII study text,
M92 Insurance Business and Finance 23/24), which would allow managers to
monitor and measure the staff members current progression against their training
plan and objectives.

It would then be essential to hold regular meetings with the staff member to
update them on their current progression, to discuss any potential issues or
concerns that need addressing and to check in on their wellbeing. The latter
would be of upmost importance to ensure that staff members do not feel isolated
and they remain part of the overall team.

(ii) At present, the panel of insurance brokers that are used by KR Ltd have indicated
that they are unhappy with the continuous missed deadlines and poor record
keeping within the business.

In this situation, it would be prudent to firstly understand why exactly the

deadlines are continually missed and the records are not being kept consistently.
It would be useful to collate the information by performing a SWOT analysis,
which would indicate the strengths, weaknesses, opportunities and threats
currently faced within the business (CII study text, M92 Insurance Business and
Finance 23/24). The information accumulated would be operational information,
as opposed to strategic or tactical information.

Once this information has been collected, it can then be dissected and analysed
by senior managers within the organisation with the intention of putting SMART
plans in place that give the relevant staff the necessary tools and time needed to
complete their objectives within the allocated deadline.

(iii) It has been noted that since the previous managing director left his role six
months ago, there has been a lack of senior management leadership and
subsequently, managers and employees alike are inconsistent in their daily
decision making.

Lack of decision making within an organisation is likely to lead to uncertainty

throughout the business. This subsequently may have further negative impacts
on many other factors, from staff morale, communication with customers and
communication with other organisations that the business uses. Inevitably, in the
long term, if this issue is not resolved then it could lead to loss of customers and
the breakdown of the business.

To fix this issue, KR Ltd should adopt a hierarchical approach to their decision
making process. Meaning that relevant departmental managers are given the
trust and responsibility to make informed decisions as outlined in their role and
are made accountable as such. Once decisions have been made, they should be
communicated throughout the organisation, to the relevant staff members to
ensure that they are kept well informed on activities or developments within the
business.
 C) There are several key management skills that could be utilised in delivering a
resolution to the operational issues that are currently being experienced by KR Ltd.

The first management skill would be the use of adequate communication which
includes listening. As staff are working in an agile environment and there is the ability
to work from home, it is imperative that managers communicate with their staff on a
regular basis, whether that be as a team or individually. This would ensure that staff
feel involved and updated on the current position within the business.

The second management skill would be the use of time management. It has been
noted that KR Ltd frequently miss their deadline. Therefore, having a structure in
place to ensure that deadlines are met in a timely manner would resolve complaints
from their insurance brokers and enhance the service offered.

The final management skill would be leadership and decision making. Clearly, KR Ltd
have lacked senior leadership and consistency within their decision making
processes throughout the business since the previous managing director left.

With the introduction of a clear hierarchy within the business structure that, KR Ltd
could outline the responsibilities of managers in a particular sector and as such,
rigidity and accountability for decisions that are made. Providing accountability is
vitally important in ensuring that decisions, performance and operations can be
effectively monitored.

Question 3

You are the Company Secretary for TF Ltd, a family-owned insurance broker.

TF Ltd intends to list its ordinary shares on the London Stock Exchange (LSE), within the
next six months.

This intended listing is likely to raise several corporate governance issues for TF Ltd. You
are aware of the following:

• TF Ltd.’s Chairperson is the founder of the business. The Chairperson also

works for one of the insurers with whom TF Ltd has a business relationship.
• All Non-Executive Directors (NEDs) of TF Ltd were appointed by the
Chairperson and are all members of the same family.
• The Chairperson's nephew is the Chief Risk Officer and is rarely challenged
by TF Ltd.’s Board on his risk management decisions.
• All TF Ltd.’s Board members have been on the Board for more than 15 years.
• TF Ltd.’s strategy, given its forthcoming listing, is to grow significantly.

TF Ltd.’s Board have asked you to review its corporate governance issues, prior to TF Ltd
listing its shares on the LSE.

A) Explain, with justification, three significant corporate governance issues that will
need to be considered by TF Ltd, before the ordinary shares are listed on the
LSE. (12)
 B) Recommend, with reasons, two actions to address the significant corporate
governance issues, you have explained in (a) above. (8)

Answer

A) Any company wishing to have their shares listed on the stock exchange will need to
abide by the Stock Exchange Listing Rules or explain why they are not compliant
with the rules within their annual report.

Therefore, should TF Ltd choose to list their shares on the London Stock Exchange
in the near future, there are several corporate governance issues that will need to be
addressed in preparation.

(i) The most significant corporate governance issue facing TF Ltd is that revolving
around the chairperson also working for an insurer, which TF Ltd has a business
relationship with.

Given the chairpersons position at the broker, this would raise a significant issue
in relation to a potential conflict of interest for TF Ltd. A conflict of interest can
arise when a person within the company has personal interests or an association
with another party, an expectation of a future interest in another party or a
financial interest in another party, which in this case is the insurance company
that they are also working for.

Normally it is the responsibility of the chairperson to ensure that conflicts of

interest are mitigated, however given that the chairperson is the subject of the
conflict of interest, it would be prudent to ensure that controls and procedures are
in place to avoid the conflict.

(ii) We are aware that all of the non-executive directors of the company are
members of the same family and furthermore, were all appointed by TF Ltd.’s
chairperson. There are two corporate governance issues at play here. Firstly, all
directors of TF Ltd should be subject to a formal, rigorous and transparent
appointment procedure and their appointment should be based on merit and not
family ties (CII study text, M92 Insurance Business and Finance 23/24).

Secondly, to ensure the company complies with the corporate governance code,
the board of directors should include an appropriate combination of non-
executive and executive directors. The reason for this is to eliminate the risk that
there is a domination effect within the decision making processes within TF Ltd
(CII study text, M92 Insurance Business and Finance 23/24).

(iii) It has been mentioned that the Chief Risk Officer of the company is the nephew
of the chairperson and that he is rarely challenged by the board members on his
management decisions.

The board of directors should be active in continuously providing constructive

challenges to the decisions that are made throughout the company (CII study
text, M92 Insurance Business and Finance 23/24). The reason for this is to
ensure that they are supporting the long term sustainable success of the
business and that they are assisting the business in meeting its goals and
objectives.
 A) It is evident that TF Ltd have several issues that need to be addressed before they
can comply with the corporate governance code and the Stock Exchange Listing
Rules.

(i) As we are aware, there is a potential conflict of interest as the chairperson of TF

Ltd is also an employee of an insurance company with which there is a business
relationship.

To address this issue, it would be advisable for the chairperson to complete a

directors disclosure of interest form, which would hold details of the relationship
between the chairperson and the insurance company (FCA.org.uk). Should there
be any changes to the relationship, the chairperson should inform the company
secretary immediately to ensure that the risk is being managed correctly. There
should also be further reporting on conflicts of interest procedures within the
company’s annual reports.

Furthermore, it may be essential to receive authorisation from the board of

directors for the chairperson to continue within their role given the conflict of
interest. In order for the directors to authorise this, they would need express
powers that are contained within the company’s Articles of Association.

(ii) The second issue that would need to be address here is the composition of the
board and their relationships with each other.

As previously mentioned, to ensure that TF Ltd comply with the Corporate

Governance Code and the Stock Exchange Listing Rules, it would be advisable
for board members to be subject to a formal, rigorous and transparent
appointment procedure, rather than handpicked by the chairperson. The board
should also be made up of non-executive and executive directors and have a
diverse background.

It would also be advisable for the company to have an annual evaluation

procedure in place to monitor the board members individual performance and if
each director is still contributing effectively.

Having these processes in place would ensure that the board has a clear division
of responsibilities and can be held accountable. It would also ensure that the
board is not dominated by a small group of directors and that there is no risk of
domination over decision making (CII study text, M92 Insurance Business and
Finance 23/24).

Question 4

You are the Underwriting Manager of GR plc, an insurer. One year ago, GR plc provided
delegated underwriting authority to a managing general agent (MGA).

The first annual audit of the MGA by GR plc highlighted the following issues:

 The premium discounts offered by the MGA on new and renewal business are often
more attractive than those that GR plc offer directly.
  There is a wide interpretation by the MGA of GR plc's risk acceptance criteria,
resulting in some policyholders being outside of GR plc's risk appetite.
 There is a slow transfer of data from the MGA to GR plc. This is in breach of the
service legal agreement, which accompanies the delegated authority agreement.

You are concerned that the MGA's service does not meet the high service performance
delivered by GR plc.

A) Identify, with justification, the common function within GR plc that is most impacted
by greater premium discounts offered by the MGA. (3)
B) Identify, with justification, the common function within GR plc that is most impacted
by some policyholders being outside of its risk appetite. (3)
C) Identify, with justification, two common functions within GR plc that are most
impacted by a slow transfer of data from the MGA. (6)
D) Recommend, with reasons, two significant actions GR plc could take to improve the
service performance of the MGA. (8)

Answer

A) In this scenario, the MGA are offering more attractive premium discounts than those
being provided directly by GR Plc.

The common function within GR Plc that will be impacted the most by the discounts
being offered are those that are performed by the underwriting team.

It is the role of the underwriting team to ensure that adequate premiums are
calculated so that the subsequent claims of the few can be fully met and that the
company is profitable (CII study text, M92 Insurance Business and Finance 23/24).

Should the MGA be offering greater premium discounts, then this may lower the
overall performance of the book and subsequently impact the capital available to pay
claims and make a profit.

B) Here, we have a situation in which the MGA are underwriting risks that fall outside of
GR Plc.’s risk appetite.

The common function within GR Plc that will be impacted the most by the MGA
placing risks that are outside of their appetite will be the claims team.

The claims teams responsibility is to “ensure that when claims are made the
policyholder receives a fair and equitable settlement for their loss, in accordance with
the contractual obligations of the insurance policy” (CII study text, M92 Insurance
Business and Finance 23/24).

Given this responsibility, the claims team need to ensure that valid claims are fairly
valued. If the MGA are placing risks that are outside of GR Ltd.’s appetite, then they
are exposing GR Plc to potentially higher amounts of claims and subsequent outlay
than they had forecast.

There may be further impacts to GR Plc as if they are managing claims for which
they had no risk appetite, they may not have the necessary procedures in place to
deal with the claims efficiently and this may lead to a reduced level of customer
service and subsequent reputational damage.
C) The two common functions within GR Plc that are impacted by the slow transfer of
data from the MGA are both claims and underwriting.
 If there is a delay in receiving information from the MGA, the claims team may not
receive accurate and timely data, which will then hinder their ability to handle claims
efficiently and to the high levels of service that customers have come to expect.

The knock on effect of the delays would be the potential increase in claims costs,
there may be a potential rise in customer complaints and the overall profit of GR Plc
may be evidently impacted.

Furthermore, it is essential that the underwriting team at GR Plc are aware of the
current performance of their book of business to ensure that they are identifying any
trends or issues that need to be addressed or the underwriting risk appetite
amended.

Any delay in the transferring of data from the MGA could cause potential issues for
the underwriters. For example, the underwriting team may need to take action and
adjust their risk acceptance criteria or, adjust their premium calculations accordingly
to ensure that GR Plc can still meet their regulatory requirements to pay claims and
maintain their profitability.

D) In this scenario, there are various different issues that are being caused by the MGA.
Therefore, it is vital that GR Plc have a plan in place to rectify these issues, or they
could potentially leave themselves exposed to regulatory intervention or financial
issues.

(i) The first recommendation that should be made to GR Plc is the implementation of
a stricter, more frequent auditing process. Currently, the MGA is subject to an
annual audit of its files by GR Plc.

Furthermore, upon GR Plc providing the MGA with delegated authority, there
would have also been a service level agreement in place which details the extent
of the MGA’s authority, along with certain standards that they are required to
adhere too.

If GR Plc were to implement a stricter and more frequent audit process, then they
would be able to identify any ongoing trends or issues surrounding the MGA’s
activities and act quickly. Should the audits find that the MGA is continuing to
perform poorly, then GR Plc could restrict the MGA’s authority or remove it
altogether.

(ii) The second recommendation that should be made to GR Plc is an extensive

training programme for the MGA’s staff members.

There is no guarantee that the staff employed by the MGA have a clear
understanding of what is required to abide by the delegated authority agreement.

Given that GR Plc are keen to improve the service levels currently achieved by
the MGA, it would therefore be advisable for GR Plc to develop a training
programme that revolves around the understanding of their risk appetite, what is
within their underwriting guidelines and the levels of service expected to be
displayed.

Having a solid training programme in place allows GR Plc to ensure that the
MGA’s staff are well prepared to maintain the levels of service expected and
reduce any errors or omissions.
Question 5

You are the Claims Director for LL plc, a commercial property insurer. LL plc intends to
reduce its claims handling costs, whilst maintaining its current high level of service.

To achieve this cost reduction, LL plc is planning to outsource its claims handling activities
for all individual claims up to £15,000 in value. Additionally, LL plc wishes to manage the
expectations of all of its stakeholders, through the provision of appropriate claims handling
information.

After reviewing potential claims handling partners, CC Ltd has been identified as the
preferred outsourcing provider.

As part of the review process, the following information about CC Ltd, has been provided to
LL plc.
*Complaints as defined by CC Ltd's internal measures, not as defined by the FCA.

You are required to analyse the above information and come to a decision on whether CC
Ltd should be appointed.

(a) Explain, based solely on the information above, four issues that need further investigation
by LL plc. (16)
(b) Identify, with justification, one additional item of information required for each of the
issues you have explained in (a) above, that will assist LL plc in finalising its decision. (8)
(c) Identify, with justification, two stakeholders who will find the additional information, you
have identified in (b) above, the most useful. (6)
Answers

A) In this scenario, there are several issues that will need to be investigated by LL Plc
before appointing CC Ltd to handle their smaller claims.

(i) The first issue that will need to be addressed is surrounding the number of
complaints received by CC Ltd. Between the period of 2020 to 2022, there has
been a significant increase of 475% in the number of complaints received, as
defined by CC Ltd.’s own complaints procedure.

Before LL Plc appoint CC Ltd, it would be vigilant of them to request further

information regarding the nature of the complaints received. This would allow
them to assess the information and consider any potential impact on their own
stakeholders experience.

(ii) The second issue that will need to be addressed is surrounding the number of
claims handled and the average claim settlement time. We can see that number
of claims handled has increased from 2020 by 190% and the settlement time has
increased by 6 days.

With the information provided by CC Ltd, it is clear that there has been a much
larger influx of claims handled in comparison to the previous two years and LL
Plc should consider the capacity that CC Ltd have in handling this volume of
claims, whilst ensuring that their level of service is not compromised.

(iii) The third issue that will need to be addressed is surrounding the decrease in staff
retention.

With the information provided by CC Ltd, it is evident that the number of staff
handling claims has barely increased from 2020 and furthermore, not increased
at all from 2021, even though there has been an increase in claims handled. It is
also clear that there has been a significant reduction in staff retention.

It would be prudent of LL Plc to request further information regarding the decline

in staff and how CC Ltd plan to address increase retention. Should CC Ltd
continue to have a high staff turnover, this could impact on the customer service
levels provided and the number of complaints received.

(iv) The final issue that would need to be addressed is surrounding the reduction of
CC Ltd.’s ability to meet their service level agreement.

Since 2020, CC Ltd have seen a steady decline in their ability to meet their
service level agreements. It would therefore be advisable for LL Plc to request
 information surrounding the reasons for the decline and what action plans are in
place to ensure that this is addressed going forward.

If this issue is not resolved, it may lead to future problems for LL Plc in the form of
delays of information being provided, damage to their reputation and potential
issues for customers.

B) The below information would be required for the issues raised above.

(i) Given that there has been a significant increase in complaints received by CC
Ltd, it would be prudent of LL Plc to request detailed information regarding these.

LL Plc should request a report from CC Ltd that details the nature of the
complaints received from its customers to allow them to identify any ongoing
trends. Having this information would provide LL Plc with the necessary details to
understand these trends and also formulate a plan in order for these to be
addressed.

(ii) There has been a significant rise in the amount of claims being handled by CC
Ltd in the previous two years.

It would therefore make sense for LL Plc to request information regarding CC

Ltd.’s future planning and how they are intending to manage any surges in claims
being received. This information should also include a plan on how they maintain
or increase their service levels during these busier times.

(iii) Clearly, CC Ltd have an issue with their staff retention and this has decreased
dramatically in the last two years.

In order to understand this, LL Plc could request specific information from CC Ltd
on the turnover within particular types of job roles to identify any problem areas.
Furthermore, it would be useful to obtain information from staff satisfaction
surveys or exit interviews of employees that are departing the company to obtain
their feedback as this will also highlight any ongoing concerns.

(iv) Looking at the information provided, there has been a steady decline in CC Ltd.’s
ability to meet their service level agreements.

In order to assist LL Plc in making its decision on whether or not to appoint CC

Ltd, they should request information relating to the specific areas of the service
level agreements that CC Ltd have previously had shortcomings, comments from
CC Ltd as to why these targets have not been achieved and what the future plans
are to rectify these issues going forward to ensure that the level of service is
increased.

C) There are various stakeholders of LL Plc that will find the information provided by CC
Ltd of interest.

The first stakeholder who will find the additional information useful will be that of the
senior management team of LL Plc. The senior management team will use the
additional information provided to assess the performance and capabilities of CC Ltd
in handling their claims effectively and to an agreed level of service.
 The senior management team will also be able to use the additional information to
understand what CC Ltd.’s current problems are and what plans they have in place to
resolve these.

The second stakeholder that will find the additional information useful will be the
customers of LL Plc. The customers of LL Plc will want to be assured that LL Plc’s
decision to outsource their claims handling will not have an impact on the current
service levels they receive.

By having access to the additional information supplied by CC Ltd, LL Plc’s

customers will be able to understand any current issues that CC Ltd have and what
action plans are in place to resolve these. This will reassure the customers about LL
Plc’s decision to outsource claims and ensure that their confidence in LL Plc is
maintained.

Question 6

BD plc, an insurer with significant property and liability accounts, is facing uncertainty about
the future cost of claims in its insurance portfolio.

Approximately two years ago, BD plc widened its risk appetite and also commenced
underwriting cyber liability insurance.

BD plc has identified that climate change is having a significant impact, on claims
frequencies, in several countries in which it operates.

(a) Explain, with justification, the difficulty for BD plc in estimating the cost of cyber liability
claims. (5)
(b) Explain, with justification, the difficulty for BD plc in estimating the frequencies of climate
change related claims. (5)

Answers

A) There are several factors that could make it difficult for BD Plc to estimate the cost of
their cyber liability claims.

Cyber insurance is a relatively new concept within the insurance market. Given that
BD Plc have only been underwriting Cyber insurance themselves for approximately
two years, there is a clear lack of historical data available to them that will allow them
to analyse and predict future claims accordingly.
 Furthermore, costs can be difficult to predict due to the nature and complexity of a
particular incident. For example, a company may be subject to a ransomware attack,
which would also include a potential interruption to the business and further
reputational damage.

To conclude, given that there may be a lack of historical data for BD Plc, and the fact
that Cyber attacks are ever evolving, this may cause issues in forecasting future
claims costs.

B) There are a range of difficulties for BD Plc which will obstruct them from estimating
the frequency of climate change related claims.

Climate change has been the driving factor in a huge range of weather related events
from hurricanes, flash floods and most recently, wild fires. The biggest issue for BD
Plc is that given the spontaneous and ever changing nature of these events, it is very
difficult to predict with any accuracy, if and when these events are likely to happen.

Another factor which will make it difficult for BD Plc to predict the frequency of climate
change related claims is the geographical widespread nature of these incidents.
Historical data on climate change related claims may show little or no incidents within
BD Plc’s particular jurisdiction, however as these incidents have the potential to
impact a large geographical area, incidents that occur from further afield may then
have a ripple effect and cause a loss which BD Plc are subsequently insuring.

To summarise, given that climate change is ever changing, it is difficult to predict the
impact this may have on BD Plc’s future claims.

Question 7

You have received an offer of employment as the Sales Director from CC plc, an insurer.
Before deciding whether to accept the offer, you review the recent financial performance of
CC plc. From CC plc's website, you obtain the following extract of its recent financial
performance.
(a) Calculate, showing all your workings, the four most relevant ratios to highlight the
financial position of CC plc, when considering the offer of employment. (8)
(b) Analyse, based on your calculations in (a) above, whether CC plc is likely to be a
financially secure employer. (8)
(c) Identify, with justification, the two most significant financial concerns to discuss with CC
plc, before deciding on the offer of employment. (4)

Answers

A) There are several accounting ratios that will highlight the current position of CC Plc.

(i) The first ratio that should be considered is the net profit percentage ratio. The net
profit percentage ratio will give an indication of how well CC Plc are managing
their business expenses (CII study text, M92 Insurance Business and Finance
23/24).

The calculation for this would be CC Plc’s net profit divided by their sales
(revenue/turnover), multiplied by 100. Therefore, in this scenario, this would be
(150/1,549) x 100 = 9.68%

(ii) The second ratio that should be considered is the combined ratio. The combined
ratio measures how well the underwriting department is performing by combining
the claims ratio with the expense ratio and the commission ratio (CII study text,
M92 Insurance Business and Finance 23/24).

The calculation for this would be CC Plc’s claims incurred net of reinsurance,
administration expenses and acquisition costs, divided by earned premium net of
reinsurance and then multiplied by 100. Therefore, this would be (1,057 + 134 +
118) / 1,231 = 1.06336 x 100 = 106.34%.

(iii) The third ratio that should be considered is the return on equity ratio. The return
on equity ratio measures how well the company is making money for its investors
and is concerned with the relationship of profit to the shareholders capital (CII
study text, M92 Insurance Business and Finance 23/24).

The calculation used to obtain the return on equity ratio is profit after tax divided
by shareholders equity, multiplied by 100. Therefore, in this scenario it would be
150 / 990 = 0.15151 x 100 = 15.15%.

(iv) The final ratio that should be considered is the claim ratio. The claim ratio will
give an indication of CC Plc’s financial stability and its overall ability to pay its
claims.

The calculation used to obtain the claim ratio is claims incurred net of reinsurance
divided by earned premium net of reinsurance. Therefore, in this scenario it
would be (1,057 / 1,231) x 100 = 85.87%.

B) With the information provided in the calculations above, we can obtain an insight in to
the financial security of CC Plc.

(i) Looking at the first calculation, CC Plc’s net profit margin of 9.68% would indicate
a relatively average profitability in relation to their overall income for companies
within the sector. Should this margin decrease over time, whilst the gross profit
remains the same, this may indicate a lack of control surrounding expenses (CII
study text, M92 Insurance Business and Finance 23/24).
 (ii) The second calculation that we have considered is the combined ratio. Normally,
a combined ratio of over 100% indicates an underwriting loss, with anything over
110% indicating catastrophe losses (CII study text, M92 Insurance Business and
Finance 23/24). Given that CC Plc’s combined ratio is 106.34%, this would
indicate that they are currently operating on an underwriting loss.

(iii) The third calculation that we have considered is CC Plc’s return on equity. Using
the figures provided, CC Plc currently has a return on equity of 15.15%. This
would indicate that CC Plc are generating a relatively healthy return for their
shareholders.

(iv) The final calculation that we have considered is CC Plc’s claims ratio. Using the
figures provided, CC Plc currently has a claim ratio of 85.87%. This would
indicate that CC Plc are using a large amount of their profits to pay for claims.

To conclude, by using all of the information that we have calculated, it would appear
that CC Plc are a relatively secure employer, although there are definitely elements
that will need to be improved.

C) Using the information provided and the various different calculations, we have
established some areas that will need to be addressed within CC Plc.

(i) The first area that will need to be discussed with CC Plc is their underwriting
activities as these are currently running at a minor loss.

It would be prudent of CC Plc to look further at their particular lines of business to

understand what areas are currently of concern and if they should consider
amending their underwriting criteria to enhance their overall underwriting
performance.

Should CC Plc continue to trade at an underwriting loss, this will impact their long
term financial stability.

(ii) The second area that will need to be discussed with CC Plc is their claims ratio
as they are currently outlaying a large amount of their premiums being paid on
paying subsequent claims.

It would be advisable for CC Plc to review their current claim ratio to understand
how certain risks are currently performing. By having this information it would
allow CC Plc to analyse their risk management and current underwriting criteria
allowing them to make necessary changes to obtain improvements.

Although CC Plc are currently able to meet their obligations to pay claims, it
would be beneficial to reduce the claim ratio to enhance overall profits.

Question 8

You are an actuary for FD plc, a large general insurer.

In previous years, FD plc's financial performance has supported the payment of annual
dividends to its shareholders. However, FD plc has not met its financial targets for the
current year and is close to breaching its solvency capital requirements (SCR).
In response to the financial challenges, the Board of FD plc has made the decision not to
pay dividends to its shareholders for the current financial year. However, it is the Board's
intention to resume dividend payments at the earliest opportunity.

The Board of FD plc has asked you to review the effect of the dividend payment decisions.

(a) Identify, with justification, two risks that FD plc is exposed to, by not paying dividends for
the current financial year. (4)
(b) Explain briefly, two financial options that FD plc could take to support the resumption of
dividends. (6)

Answers

A) In this scenario, FD Plc are on the verge of breaching their solvency capital
requirements and have made a decision to not pay dividends.

(i) The first risk that FD Plc are exposed to by not paying dividends to their
shareholders would be that of shareholder dissatisfaction.

The shareholders of FD Plc may have become accustom to a regular income

from their investment within the company and should this temporarily not be the
case, this may be disappointing. Furthermore, a knock on effect of this may then
lead to the shareholders of the company losing confidence and subsequently
questioning the financial strength of the company as a whole.

Should this be the case, some shareholders may look to sell their shares at a
reduced price, which would then further impact the company’s overall capital.

(ii) The second risk that FD Plc are exposed to as a result of the decision to cease
shareholder dividend payments is that of access to future capital and
investments.

Normally, investors of any company are generally looking to invest their money to
make as much profit as possible from their investments. If FD Plc made the
decision to temporarily suspend their dividend payments, this may deter potential
investors who are looking for a regular income.

Furthermore, not only would this deter this type of investor, but it may also hinder
FD Plc’s chances of obtaining investment in the future, whether that be for an
injection of capital for growth, or to meet regulatory requirements going forward.

B) There are various different options available to FD Plc which will allow them to
resume making dividend payments to their shareholders in the future.

(i) The first option that is available to FD Plc would be attempting to raise additional
capital through the issuing of new shares.

Should FD Plc look to issue new shares in the hope of attracting potential new
investors, they should first assess the amount of capital they require to distance
themselves from breaching their solvency capital requirements.

They can do this by using a standardised formula, intended on capturing their risk
profile, such as underwriting risks which are relevant to their business. From this,
they can then use a prescribed calculation methodology to determine the quantity
 of capital they require (CII study text, M92 Insurance Business and Finance
23/24).

Once they have this information, they will then be able to issue the new shares
required in order to obtain the necessary capital injection and reduce their risk of
breaching their solvency capital requirement and subsequently resume
shareholder dividend payments.

(ii) The second option that may be available to FD Plc which would allow them to
resume making shareholder dividend payments would be potential reinsurance.

If FD Plc were to enter in to an agreement with a reinsurer to cover some of their

risks, they would essentially transfer this risk to the reinsurer in exchange for an
insurance premium.

The main benefit of FD Plc transferring some, or all of their applicable risks to the
reinsurer would be the reduction in the need for them to retain the extra capital
that they require to cover these risks. This would then have a further knock-on
effect on FD Plc as it would allow them to use this regained capital to ensure that
they are not breaching their solvency capital requirements and to resume their
shareholder dividend payments.

Not only would this have the above impact, it may also make FD Plc a more
attractive proposal for future investors, which would further enhance their capital
position.
Question 9

You are the newly appointed Financial Director for DD plc, an insurance broker.

You have received the following financial statements, prior to your first attendance at a DD
plc Board meeting.
(a) Explain, with justification, five significant challenges for DD plc from your interpretation of
the above financial statements. There is no requirement to show calculations or workings.
(15)
(b) Recommend, with reasons, one key action for each of the five significant challenges you
have explained in (a) above. (15)

Answers

A) By using the information provided in this scenario, we can understand the current
position of DD Plc and the issues that they are currently facing.

Aside from the issues below, it should be noted that DD Plc’s balance sheet does not
balance and therefore, there is a miscalculation somewhere within their figures.

(i) The first of the significant challenges that are being faced by DD Plc surrounds
their current liquidity.

A company’s liquidity can be calculated by taking their current assets and dividing
this by their current liabilities, this is known as the current ratio. Generally, a
current ratio of more than 2 is seen as prudent in order to maintain
creditworthiness, however a figure of 1.5 has become quite normal (CII study
text, M92 Insurance Business and Finance 23/24).
 By using the above calculation, we arrive at a current ratio for DD Plc of 0.955%.
This would indicate that DD Plc are suffering from financial troubles and this
needs to be addressed urgently.

(ii) The second of the significant challenges that are being faced by DD Plc is around
their profit for the year.

By using the information provided on the income statement, we can see that DD
Plc have actually made a loss of £110,000 for the year ending December 2022.
This would indicate that the company’s core operations are not generating
enough income in order to cover their expenditure.

This result would raise concerns around DD Plc’s long term sustainability and
would need to be addressed urgently.

(iii) The third of the significant challenges that are being faced by DD Plc is around
the current costing of their offices.

Again, by using the information provided within this scenario, we can see that DD
Plc have office costs of £5,380,000.00. This is virtually half of the income that is
generated by the company and indicates that their ratio of expenditure to profit is
flawed.

In order to improve the profit margin, DD Plc should look at ways of decreasing
the amount of their office costs.

(iv) The fourth of the significant challenges that are being faced by DD Plc is around
their non-current liabilities.

By using the information provided within the balance sheet, we can conclude that
DD Plc have long term borrowings of £6,280,000.00. The problem with debt is
that interest must be paid on the debt, and the debt itself must be repaid on the
due date, no matter how well or badly the company is doing. If it is unable to pay
such interest, then it can be the end of the company. So, the higher the level of
debt, the greater the risk (CII study text, M92 Insurance Business and Finance
23/24).

It is crucial that DD Plc manage their debts as effectively as possible in order to

avoid any potential financial issues in the long term.

(v) The final significant challenge that is being faced by DD Plc is around their high
gearing ratio.

According to CII study text, M92 Insurance Business and Finance 23/24, gearing
ratios of between 25% and 50% are typical for companies. A gearing ratio would
indicate the extent to which a company finances it activities from borrowings as
opposed to shareholders equity (CII study text, M92 Insurance Business and Finance
23/24).

The gearing ratio is calculated by taking long term borrowings and dividing this by
shareholders equity, multiplied by 100. Therefore, here we have (£6,280,000.00 /
£5,200,000.00) x 100 = 120.77%. This gearing ratio would imply that DD Plc are
heavily relying on debt to finance their activities.
B) There are many different actions that could be taken to improve the financial position
of DD Plc, the most significant of which are listed as below.

(i) The first key action that needs to be taken is that revolving around DD Plc’s
current challenge with their liquidity.

Currently, DD Plc have trade receivables of £16,020,000.00, which is high in

comparison to their cash and cash equivalents of £5,390,000.00. This information
would indicate that a lot of their income is currently tied up, which can potentially
impact their liquidity. By ensuring that a robust process is in place to lower their
trade receivables, this will provide them with a better cash flow and assist them in
paying their short term debt obligations.

To resolve this issue, a recommendation should be made to DD Plc for the

implementation of a stricter process surrounding how they manage their trade
receivables. DD Plc could also conduct a client credit assessment to minimize
any potential risk of bad debts.

(ii) The second key action that needs to be taken is surrounding DD Plc’s net profit
for the year.

By using the information provided on DD Plc’s balance sheet and income

statement, we can clearly see that currently, DD Plc have actually made a loss of
£110,000.00 for the year ending 31st of December 2022. Although most
bankruptcies are not caused by a lack of profitability and more by the inability to
pay creditors on time (CII study text, M92 Insurance Business and Finance
23/24) this is clearly an issue that needs urgently addressing.

To combat this issue, a recommendation should be made to DD Plc to conduct a

thorough analysis of their current income and expenditure. Once this information
is available, they will be able to review any cost saving measures for example,
potential staff reduction or the renegotiation of third party supplier contracts.

By streamlining their current expenditure, DD Plc will hopefully improve their

yearly net profits.

(iii) The third key action that needs to be taken by DD Plc is surrounding their current
office costs.

Again, by using the information supplied on the balance sheet and income
statement, we can see that DD Plc currently have overall office costs of
£5,380,000.00, which is over half of their expenses for the year ending 31st of
December 2022.

Therefore, it would be sensible to make a recommendation to DD Plc advising

them to investigate their current office structures. Once this investigation has
been completed, DD Plc will be able to identify any areas whereby cost saving
measure can be applied, for example by utilising office space, renegotiating lease
terms or adapting to hybrid working.

(iv) The fourth key action that needs to be taken by DD Plc is surrounding their non-
current liabilities.

Non-current liabilities refer to long term debts that are held by DD Plc. By using
the information supplied in the balance sheet, it can be noted that DD Plc
 currently have non-current liabilities of £6,280,000.00. For any company, having
high levels of debt increases their risk of financial turmoil as these debts must be
repaid on time. Furthermore, having debt also means that there is interest
payable.

It should be recommended to DD Plc that they review their current long term
borrowing arrangements in order for them to re-pay these as quickly and
efficiently as possible. This could be by refinancing their debts in order to obtain
favourable interest rates or restructuring debts over different periods.

(v) The fifth and final key action that needs to be taken by DD Plc is around their
current gearing ratio.

The gearing ratio measure the extent of which a company uses debt to finance its
operations. Although having some debt within the capital structure is acceptable
and normal, having too much debt can leave a company at a higher risk of future
financial troubles. As we have already established, DD Plc have a relatively large
amount of debt and their finance costs are more than their operating profits.

With this in mind, it should be recommended that DD Plc work toward lowering
their gearing ratio and reducing their overall debt. There are several methods
available to lower their gearing ratio, one of which is to issue new shares in the
company and encourage outside investment, increasing their overall equity.
Another method available would be to adjust any dividend payment policies to
retain more of the companies earnings instead of distributing these to
shareholders.

Question 10

You are a finance manager for BF plc, a general insurer with an extensive range of
shareholders. BF plc has pursued a successful organic growth strategy and plans to
continue this over the next five years.

This growth strategy is based on growing its policyholder numbers by offering highly
competitive premiums. BF plc recognises its profitability is impacted by this approach to
pricing.

BF plc's growth strategy has resulted in annual cash outflows, which are predicted to
continue for the foreseeable future. To date, BF plc's cash outflows have not impacted its
credit ratings, as assessed by the credit rating agencies. BF plc's growth strategy is
dependent on maintaining its current credit ratings over the next five years.

At the end of this five-year period, BF plc expects to adjust its pricing to maximise
profitability.

(a) Identify, with justification, two potential negative implications for BF plc, created by its
organic growth strategy. (6)
(b) Identify, with justification, two actions BF plc could take to mitigate the effect of the cash
outflows. (6)
(c) Explain, with justification, the extent to which the results of BF plc's organic growth
strategy will influence the credit rating assessments, made by the credit rating agencies.
(12)
(d) Identify, with justification, two possible financial implications that BF plc's growth strategy
could have on its shareholders. (6)
Answers

Organic growth is where a company develops and expands by increasing its sales, revenue
and output through its own current businesses, activities, and effort, rather than through
mergers or acquisitions (CII study text, M92 Insurance Business and Finance 23/24).

A) There are a few negatives to having an organic growth strategy and these are
discuss further below.

(i) The first potential negative for BF Plc by having an organic growth strategy that is
revolved around highly competitive premiums is the potential for reduced net
profitability.

As BF Plc are employing an aggressive strategy in reducing their premiums in

order to attract new business, they may find themselves struggling to cover
relevant claims and operating costs effectively, which would subsequently eat in
to their net profits. Not only this, but it may also impact their ability to pay
dividends to their shareholders and raise questions over the long term
sustainability of the company.

Should BF Plc continue with their organic growth strategy, they would also need
to reinvest in relevant I.T systems, staff and facilities. It would therefore be
advisable for them to match their growth in line with their growth in premium
where possible (CII study text, M92 Insurance Business and Finance 23/24).

(ii) The second potential negative for BF Plc by having an organic growth strategy is
the time it may take to see results on their investments.

Normally, should a company employ an organic growth strategy, then they should
be aware that not only will this require investment of their capital, it will also
require a large investment of their time. As BF Plc grow, they will also need to
recruit employees that can handle the growth process along with other actions
that are required to move the business forward (CII study text, M92 Insurance
Business and Finance 23/24). Given BF Plc’s strategy is revolved around highly
competitive premiums, they should also ensure they have the necessary capital
to keep reinvesting over the long term.

Furthermore, should BF Plc want to grow by entering in to new lines of business,

it will take them time to produce the necessary marketing material and then get
their products known in the relevant fields.

B) It is vital that BF Plc have the necessary capital available to not only continuously
reinvest in their organic growth strategy, but also to ensure that they can meet their
ongoing obligations when they fall due. BF Plc should have a solid cash flow forecast
will allow them to gauge their cash flow and avoid potentially crippling cash shortages
in the future.

(i) There first option that BF Plc have to mitigate the effect of their cash outflow is by
the use of debt and financing.

Given that BF Plc are continuously investing in their organic growth strategy and
this strategy involves highly competitive premiums, it is not surprising to see that
they are predicting further cash outflows for the foreseeable future. In order to
combat this, BF Plc could consider taking on additional debt through loans. This
 would provide them with a temporary source to fund their growth whilst
maintaining their credit rating.

Should BF Plc decide to use this approach then they would need to carefully
managed this to avoid receiving large amounts of interest expenses or missing
their payments.

(ii) The second option that BF Plc have to mitigate the effect of their cash outflow is
by the issuance of new shares in the company.

Normally, the most common reason for issuing new shares within the company is
to help them to raise capital for the longer term and support their organic growth.
The reason that this could an option for BF Plc would be to obtain a quicker
source of cash from investors as they purchase new shares. This would then
assist BF Plc to manage their overall cash flow and avoid liquidity issues.

Furthermore, this would also assist BF Plc in meeting their regulatory capital
requirements under Solvency II.

C) Insurers regularly use the services of credit rating agencies, not only to measure their
ability to pay claims, but to also provide an opinion on their financial strength.
Furthermore, having a solid credit rating is beneficial to insurers as they will be able
to show potential customers that they are a company that can be relied upon (CII
study text, M92 Insurance Business and Finance 23/24).

As noted in Chapter 10 B in CII study text, M92 Insurance Business and Finance
23/24, under the Solvency II directive, there is an overriding regulatory requirement
that: ‘A firm must at all times maintain overall financial resources, including capital
resources and liquidity resources, which are adequate, both as to amount and
quality, to ensure that there is no significant risk that its liabilities cannot be met as
they fall due.’

Essentially, under the Solvency II directive, BF Plc are required to forecast any
expected future liability cash flows and also hold a certain amount, quality and type of
Tier 1 capital that will allow them to absorb losses on an going-concern basis. Further
to this, BF Plc will be required to meet the solvency capital requirement and minimum
capital requirements as set out in the Solvency II directive. The solvency capital
requirement relates to the quantity of capital that is intended to provide protection
against unexpected losses over the following year. The minimum capital requirement
denotes a level below which policyholders would be exposed to an unacceptable
level of risk and is intended to correspond to an 85% probability of adequacy over the
following year (CII study text, M92 Insurance Business and Finance 23/24).

Ratings are normally provided by one of the four main rating agencies, these are
Standard and Poor’s, AM Best, Moody’s and Fitch. Once the agency has been
selected, they will then meet with BF Plc’s senior executives to understand the
company. Subsequently, they will then analyse the company and use the information
collated to provide a rating. Each agency will have their own rating structure and
depending on the agency used, will depend on the rating that is given.

Given that BF Plc are planning to grow by using an organic growth strategy that
comprises mainly of highly competitive premiums there is a risk of cash flow issues.
The reason for this is normally due to the ongoing requirement for continuous
investment from within the organisation and the delay in seeing results from these
investments, all whilst they have their ongoing liabilities to meet. The issue with this
 type of growth strategy is that there is a possibility of tighter margins from their
underwriting activities due to premium levels which can lead to cash flow problems.

Should this be the case and BF Plc encounter cash flow problems, then there is a
risk that they will not hold the necessary capital which would allow them to absorb
their liabilities as and when they arise and as a result, this will negatively affect their
credit rating. A negative credit rating from a rating agency may further impact BF Plc,
as customers and investors may be discouraged from doing future business with
them.

To summarise, the results of BF Plc’s organic growth strategy could have a

significant impact on their credit rating assessment. Should their strategy be
successful and the cash outflow be improved then they are likely to obtain a positive
rating. Alternatively, should they continue to see cash outflows, which may lead to
them struggling with paying their liabilities, they are likely to receive a downgrade in
rating.

D) In this scenario, there are several different potential financial implications for the
shareholders of BF Plc due to their growth strategy and two of which are detailed
below.

(i) The first potential finance implication for the shareholders is the possibility of
reduced or delayed dividend payments.

As previously mentioned, an organic growth strategy is heavily reliant on a longer

term, steady approach to growing the company through internal means and by
using continuous investment. This investment can come from various sources,
some of which may cause issues for shareholders. For example, should BF Plc
process the issuance of new shares, this may lead to a reduction in dividend
payments given the dilated amount of shareholders within the company.
Furthermore, another option would be to reduce or pause dividend payments
whilst the company retains this income to reinvest in to the company and push
their organic growth strategy forward.

Both of these examples may cause potential issues for retaining current
shareholders or attracting new investment.

(ii) The second potential finance implication for the shareholders of BF Plc is
contrary to the first in the sense that there is a possibility of an increase in share
value due to the revenue increase.

Within the organic growth strategy, BF Plc have stated that they aim to adjust
their share prices to maximise profitability at the end of the planned five-year
period. Should BF Plc’s growth strategy be successful in creasing its revenue and
profitability, then future potential investors may perceive the company as more
valuable, which in turn would lead to a demand for its shares.
By having a higher demand for shares, this could lead to a potential increase in
BF Plc’s share price for their existing shareholders and should they choose to
sell, then a return on their initial investment.

Furthermore, should BF Plc avoid the issuance of new shares as mentioned

above and then obtain the results that they are desiring, there would be fewer
shareholders within the company, which could mean increased dividend
payments for these existing shareholders.