Chartered Insurance Institute (CII) Qualifications Underwriting and Risk Management Syllabus

List the steps of the formal risk management process.

1) Risk identification; 2) Risk analysis/measurement (frequency and severity); 3) Risk evaluation/prioritisation; 4) Risk control/treatment; 5) Risk financing; 6) Monitoring and review.

Name the main risk control (treatment) techniques, often summarised as the '4 Ts'.

Tolerate (retain/accept), Treat (reduce/control), Transfer (e.g. insurance, contract), and Terminate (avoid the activity).

Distinguish 'loss prevention' from 'loss reduction' as risk control measures.

Loss prevention aims to reduce the frequency/likelihood of a loss occurring (e.g. staff training, security). Loss reduction aims to minimise the severity/impact once a loss has occurred (e.g. sprinklers, fire doors, business continuity plans).

What is 'risk retention' and what is a 'captive insurer'?

Risk retention is deliberately keeping all or part of a risk rather than transferring it (e.g. self-insurance, excesses). A captive insurer is an insurance subsidiary set up by a non-insurance parent to insure (retain) the group's own risks.

What is the purpose of an insurance 'survey' (risk inspection)?

To obtain an independent, accurate assessment of a risk so the underwriter can decide on acceptance, terms and premium; to identify hazards and recommend risk improvements; and to provide a record of the risk's features and protections.

What three elements does a property survey report typically assess (the 'COPE' approach)?

Construction, Occupancy, Protection, and Exposure (external surroundings) — collectively the COPE factors used to assess and rate a property risk.

Define an 'emerging risk'.

A newly developing or changing risk that is difficult to quantify and whose potential impact is uncertain — e.g. cyber risk, climate change, nanotechnology, AI — for which historical data is limited.

Define a 'systemic risk' and give an example.

The risk that the failure of one entity or event triggers cascading failures across an entire system or market (e.g. the 2008 financial crisis). It is correlated and widespread rather than isolated, challenging insurability.

Define 'reinsurance'.

Insurance purchased by an insurer (the cedant) from a reinsurer to transfer part of its risk, so that the reinsurer indemnifies the insurer for losses under the policies it has written.

State four key purposes/benefits of reinsurance for a cedant.

Increased capacity to write larger/more risks; stabilisation of results (smoothing volatility); protection of solvency/capital against catastrophe accumulations; and access to reinsurer expertise plus financing of growth.

Distinguish 'facultative' reinsurance from 'treaty' reinsurance.

Facultative reinsurance covers a single, individually negotiated risk where the reinsurer may accept or decline each one. Treaty reinsurance is an agreement covering a whole class/portfolio of risks automatically, without individual negotiation.

Distinguish 'proportional' from 'non-proportional' reinsurance.

In proportional reinsurance the reinsurer shares premiums and losses in a fixed proportion of each risk (e.g. quota share, surplus). In non-proportional reinsurance the reinsurer pays only losses above an agreed retention/excess point (e.g. excess of loss, stop loss).

Explain 'quota share' reinsurance.

A proportional treaty in which the cedant cedes a fixed percentage of every risk in the class; premiums and losses are shared in that same proportion (e.g. 40% quota share = reinsurer takes 40% of premium and pays 40% of each claim).

Explain 'surplus' reinsurance and how it differs from quota share.

A proportional treaty where the cedant retains a fixed monetary amount (a 'line') per risk and cedes the surplus above it, with the ceded proportion varying by risk size. Unlike quota share, the retention is a fixed sum not a fixed percentage, so small risks may be fully retained.

Explain 'excess of loss' (XL) reinsurance.

A non-proportional treaty where the reinsurer pays the part of a loss exceeding the cedant's retention (the 'excess point' or 'attachment') up to an agreed limit, e.g. £4m excess of £1m. Priced typically by burning cost or exposure rating.

What is 'stop loss' (aggregate excess of loss) reinsurance?

A non-proportional cover that protects the cedant's overall annual result by paying when the aggregate losses (often expressed as a loss ratio) in a year exceed an agreed level, up to a limit — protecting against an adverse accumulation across a whole account.

What does 'reinstatement' mean in an excess of loss treaty?

The restoration of the cover limit after it has been eroded or exhausted by a claim, allowing further recoveries during the period — usually for an additional (reinstatement) premium and subject to a stated number of reinstatements.

Define 'retrocession'.

Reinsurance of a reinsurer: the process by which a reinsurer cedes part of the risks it has assumed to another reinsurer (the retrocessionaire) to manage its own accumulation and capacity.

What is 'Alternative Risk Transfer' (ART)?

Non-traditional techniques for transferring or financing risk outside conventional insurance/reinsurance, accessing the capital markets or self-funding — e.g. catastrophe bonds, insurance-linked securities, captives, finite risk and weather derivatives.

Explain how a 'catastrophe bond' (cat bond) works.

An insurance-linked security where an insurer/reinsurer transfers catastrophe risk to capital-market investors. Investors receive enhanced interest; if a defined trigger event occurs, principal is used to pay the sponsor's losses and investors lose some/all capital. Often issued via a special purpose vehicle (SPV).

Distinguish 'indemnity' triggers from 'parametric' triggers in ART.

An indemnity trigger pays based on the sponsor's actual incurred losses. A parametric trigger pays a pre-set amount when a measurable physical parameter is reached (e.g. earthquake magnitude, wind speed), giving faster payout but introducing basis risk.

What is 'basis risk' in the context of ART/parametric cover?

The risk that the payout from a parametric or index-based instrument does not match the sponsor's actual loss, leaving a residual uncovered gap (or over-recovery) because the trigger is correlated with, but not identical to, the real loss.

Distinguish an insurer's 'technical reserves' (provisions) from its 'free reserves' (capital).

Technical reserves are liabilities held to meet expected future claims and unexpired risks on policies already written. Free reserves/capital are surplus assets over and above liabilities, providing a solvency buffer against adverse experience.

Define the 'unearned premium reserve' (UPR).

A reserve representing the portion of premiums already written but relating to the unexpired period of cover at the accounting date — i.e. premium income carried forward to match future risk exposure.

What is an 'outstanding claims reserve', and what does it include regarding IBNR?

A provision for claims that have occurred but are not yet fully paid. It comprises reserves for reported-but-not-settled claims plus IBNR — Incurred But Not Reported — claims that have happened but not yet been notified to the insurer.

What is the difference between 'earned premium' and 'written premium'?

Written premium is the total premium for policies incepted in a period. Earned premium is the portion relating to cover actually provided in that period: $$\text{Earned} = \text{Written} + \text{Opening UPR} - \text{Closing UPR}$$

What is the 'Solvency Capital Requirement' (SCR) under Solvency II?

The amount of capital an insurer must hold to absorb significant unforeseen losses, calibrated to a 99.5% Value-at-Risk over a one-year horizon — i.e. enough capital to survive a 1-in-200-year adverse event.

Distinguish the SCR from the 'Minimum Capital Requirement' (MCR) under Solvency II.

The SCR is the target risk-based capital (99.5% VaR over one year). The MCR is a lower floor (calibrated to ~85% VaR over one year) below which policyholders are exposed to unacceptable risk; breaching the MCR triggers the most serious supervisory intervention (ultimately licence withdrawal).

Name the three 'pillars' of the Solvency II framework.

Pillar 1: quantitative requirements (technical provisions, SCR, MCR, own funds). Pillar 2: governance, risk management and supervisory review (including the ORSA). Pillar 3: disclosure, reporting and market transparency.

What is the 'ORSA' under Solvency II?

The Own Risk and Solvency Assessment — an insurer's own forward-looking assessment of all material risks it faces and the capital needed to meet them, going beyond the standard SCR calculation, and central to Pillar 2 risk management.

What are the key principles governing how an insurer should invest its funds?

Security (of capital), liquidity (to meet claims when due), and yield/profitability — balanced with diversification, spread of risk, and (under Solvency II's 'prudent person principle') matching of assets to the nature, currency and duration of liabilities.