EXAMINERS’ REPORT

SA3 - General Insurance

Specialist Advanced

April 2024
 SA3 ‑ General Insurance ‑ Specialist Advanced – April 2024 - Examiners’ report

Introduction

The Examiners’ Report is written by the Chief 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.

For some candidates, this may be their first attempt at answering an examination using open
books and online. The Examiners expect all candidates to have a good level of knowledge
and understanding of the topics and therefore candidates should not be overly dependent on
open book materials. In our experience, candidates that spend too long researching answers
in their materials will not be successful either because of time management issues or because
they do not properly answer the questions.

Many candidates rely on past exam papers and examiner reports. Great caution must be
exercised in doing so because each exam question is unique. As with all professional
examinations, it is insufficient to repeat points of principle, formula or other text book
works. The examinations are designed to test “higher order” thinking including candidates’
ability to apply their knowledge to the facts presented in detail, synthesise and analyse their
findings, and present conclusions or advice. Successful candidates concentrate on answering
the questions asked rather than repeating their knowledge without application.

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.

Sarah Hutchinson
Chair of the Board of Examiners
June 2024

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 SA3 ‑ General Insurance ‑ Specialist Advanced – April 2024 - Examiners’ report

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

The aim of the General Insurance Specialist Advanced subject is to instil in successful
candidates the ability to apply knowledge of the general insurance environment and the
principles of actuarial practice to providers of general insurance. Our expectation of a
passing candidate at this stage is that they should demonstrate not only a grasp of the
technical aspects of general insurance actuarial work, but also a good sense for products,
the competitive marketplace, regulatory environments, and the operational aspects of an
insurance company. They should be able to pull together these areas of understanding to
provide well rounded advice to the users of their services.
We would offer candidates two key pieces of advice – (i) read the question properly and
(ii) plan your answer before committing to paper. We would stress that candidates do not
need to make the majority of the points included in this report to achieve a pass mark
(there are significantly more than 100 marks available for the points in this report).
Therefore, time spent making sure that you are answering the question that is asked is
more valuable than attempting to make as many points as possible, regardless of whether
they are relevant.
The wording of the question has been carefully chosen. Therefore, it is essential to read
the question properly. Various examples from this paper of recurrent failure to read a
question are noted in the commentary for the questions. 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. However, this is an exam with a finite
number of marks available and so the scope must necessarily be limited and specifically
defined.
If a question does specifically mention something, candidates should also assume that
there are 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.
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).
On the second issue, candidates should note that SA3 is the key paper at which we test
candidates’ deeper thinking. Successful candidates will be able to display some capacity
for independent and broad thinking, as well as to reward instances where these skills are
displayed. When reviewing past papers, candidates should assume that the marks
available for generic points are generally fewer 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 knowledge are lower still.
We strongly recommend that candidates step back and take the time to thoroughly think
about what is actually asked 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 event causes the claim, who reports the claim, how it is

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 SA3 ‑ General Insurance ‑ Specialist Advanced – April 2024 - Examiners’ report

dealt with once reported, what makes one claim small while another substantial, etc. This
perspective will help candidates to consider items such 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. Some examples of this failure to think more widely
on the current paper are noted in the commentary for the questions below.
More generally, we would also advise candidates to employ basic exam techniques such
as well-structured answers and effective time management. Bullet points within answers
can help make answers clearer, and we would advise candidates to ensure that separate
points are split into separate bullets and that they do not duplicate the same point across
separate bullets. Candidates should also consider the command words used and tailor the
depth of their answers accordingly.
Candidates who give well-reasoned points relevant to the specific question being asked,
which are not in the marking schedule, are awarded marks for doing so.

B. Comments on candidate performance in this diet of the examination.

A number of specific comments are provided next to the questions where there were
repeated reasons for candidates to score lower marks. These include issues in reading the
question properly and lack of consideration of secondary factors to assist with point
generation and time management.
At an overall level, the paper was generally well attempted, with many high scoring
scripts and candidates attempting all questions.
Better prepared candidates manage their time such that they have sufficient time to devote
to all questions, allowing them to generate enough scoring points. Candidates not as well
prepared may have felt rushed attempting their final question, and hence not score as well
as a result.
Higher scoring candidates demonstrated a good knowledge of the relevant subject
material and could apply it well to the scenarios given in the questions.
Responses to knowledge-based questions and questions that tested application skills were
generally good. Questions that tested higher order skills proved more challenging, and
candidate responses to these questions often lacked the breadth and depth needed to score
well.

C. Pass Mark

The Pass Mark for this exam was 65. This was deemed to be the mark achieved by the
minimally competent candidate.
492 presented themselves and 224 passed.

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 SA3 ‑ General Insurance ‑ Specialist Advanced – April 2024 - Examiners’ report

Solutions for Subject SA3 – April 2024

Q1
(i)
Improve risk management [½]
Improve overall governance [½]
React more quickly to emerging risks [½]
Improve growth through better management and allocation of capital [½]
Integrate risk into business processes and strategic decision making [½]
Ensure that there is a function within the company to identify, measure, monitor,
manage and report the risks [½]
May be required by regulation [½]
A function to help identify opportunities presented by the risks [½]
In line with the best practice in the market [½]
Marks for other reasonable points (½ mark per point).
[Marks available 4½, maximum 3]
(ii)
A risk that is not well understood as we may not yet know the existence or the
potential impact of the risk [½]
The risk may still be evolving, as well as our views of the risk [½]
and we may not be able to accurately and reliably quantify the impact of the
risk [½]
Example of emerging risk include [½]
climate change [½]
cyber risk [½]
autonomous cars within the context of motor insurance. [½]
Marks for other reasonable examples (½ mark per point); maximum 1 mark for
examples on emerging risk.
[Marks available 3½, maximum 2]

(iii)
Risk Identification - [½]
identify potential emerging risks [½]
e.g. list of threats, events cause of the risk. [½]
Risk assessment - [½]
assess likelihood and severity of impact (e.g. low, medium, high), [½]
timeframe (e.g. short term next one year vs long term more than 10 years). [½]
Examining secondary impacts [½]
Risk control - [½]
identify ways to manage the risk, mitigation plans, reduce impact/losses [½]
Risk monitoring - [½]
process in place to monitor risks, key risk indicators, escalation process if loss
event occurs [½]

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 SA3 ‑ General Insurance ‑ Specialist Advanced – April 2024 - Examiners’ report

Reporting/communication - [½]
regular reporting of KRIs to stakeholders, events that breach risk appetite and
tolerance levels [½]
feedback cycle – regular feedback loops [½]
½ mark per step, max 1.5 marks
½ mark per explanation, max 1.5 marks
[Marks available 7, maximum 3]

(iv)
Risk not well understood [½]
even if risk has emerged, government policies may influence impact, e.g. data
protection losses from cyber risk [½]
Reserving, Capital, and Pricing may already have their own approach to allow for
emerging risks [½]
need to ensure consistency of approach between different functions [½]
Events/risks could impact policies across many classes of business, and this is not
well understood [½]
Need to get buy in from different business functions and multiple stakeholders [½]
Need input from experts but this may not be available, or costly [½]
Any assessment will likely be based on numerous assumptions and expert
judgement [½]
so there are lots of uncertainty [½]
The framework might lead to company wrongly prioritising risks and decision
making, [½]
arguably the focus should be more on mature risks vs emerging risks [½]
Framework/approach needs to be fit for purpose [½]
proportional to the size of the company [½]
May not have market best practice [½]
approach will likely develop over time [½]
Unsure if events/risks would be covered by RI as there are no standardised clauses
on emerging risks [½]
Takes resources away from other parts of the business [½]
It is expensive/costly to implement [½]
Will need to comply with regulatory guidelines [½]
Marks for other reasonable points (½ mark per point).
[Marks available 9½, maximum 6]

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 SA3 ‑ General Insurance ‑ Specialist Advanced – April 2024 - Examiners’ report

(v)
Newspaper [½]
Emerging risk report publications [½]
Internal strategic plans [½]
Internal operational plans [½]
Actuarial working groups [½]
Lloyd’s publications [½]
Market research [½]
Reinsurance providers/brokers [½]
Consultants [½]
Rating agencies [½]
Regulatory guidance [½]
Marks for other reasonable points (½ mark per point).
[Marks available 5½, maximum 2]

(vi)
Low likelihood of occurring, and severity not known [½]
Risk not well understood within the business [½]
Changing environment, [½]
e.g. macroeconomic conditions, regulatory landscape, scientific and
technological development, public perceptions [½]
Lack of data to assess risks [½]
No requirement from regulators, e.g. not part of regular reporting [½]
Competitors/industry players similarly placed limited focus [½]
Sufficient excess capital [½]
Not enough resources for implementation [½]
Marks for other reasonable points (½ mark per point).
[Marks available 4½, maximum 3]

(vii)
Use visuals, e.g. risk radar, heat maps etc [½]
Use risk register [½]
Demonstrate that some risks will become emerged and give examples [½]
e.g. cyber risk previously emerging but have now emerged [½]
Clearly present short-term risks vs long-term risks [½]
period that sits in business planning, and period that is beyond that [½]
Where possible, provide simple quantification on impact, or show ranges to
demonstrate uncertainty [½]
factors that may increase/decrease the amount [½]
government regulations may influence impact [½]
Present results of a range of scenarios [½]
with various return periods [½]

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 SA3 ‑ General Insurance ‑ Specialist Advanced – April 2024 - Examiners’ report

Describe the extent of the uncertainty due to judgements/assumptions made by

management in identifying/quantifying these risks [½]
Tailor the communication to the target audience [½]
Marks for other reasonable points (½ mark per point).
[Marks available 6½, maximum 4]
[Total 23]

Commentary:
Candidates generally scored well in parts (i), (ii), (iii) and (v) of this question, noting these
were the more straightforward parts.

For the other parts of this question, which in total were worth more than half of the
question’s marks, better prepared candidates were able to generate more scoring points for
these larger parts of the question, for example by fleshing out their answers to cover a wider
range of the areas examined. Less well prepared candidates did not generate enough distinct
scoring points to score well on these parts of the question.

Q2
(i)
Business growth [½]
More investment freedom [½]
Less reinsurance [½]
so retaining more profits [½]
Survive unexpected events [½]
e.g. CAT losses [½]
Write more volatile business [½]
Required by regulators [½]
Demonstrate strength to shareholders, [½]
credit rating agencies [½]
Marks for other reasonable points (½ mark per point).
[Marks available 5, maximum 2]

(ii)
Note: points in question (ii) should be focused on the solvency calculations and
capital, instead of the wider regulatory regime which is the focus of question (iv),
but there may be some overlap.
Politician might have a different agenda [½]
Current “conservative” rules might be necessary due to rapidly changing market
conditions, [½]
where we are seeing more extreme events that threaten the solvency of firms. [½]
e.g. onset of climate change [½]

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 SA3 ‑ General Insurance ‑ Specialist Advanced – April 2024 - Examiners’ report

Level of capital commensurate with insurer’s risk profile, and this will differ by
insurer [½]
e.g. some may be required to hold proportionally more capital than others and
may be perceived as holding “conservative” amounts of capital [½]
Need a layer of conservatism to provide policyholders with additional security,
ensuring that their claims are paid. [½]
public confidence in the system/industry [½]
But statement made by the politician may have merits [½]
e.g. there is an opportunity cost of capital if current solvency capital
requirements are too conservative [½]
insurers have lower return on capital relative to its neighbours [½]
may prohibit insurers from investing in a wider range of assets [½]
e.g. renewable energy projects/investments [½]
Current approach or formula to determine capital, for standard formula, may be
based on outdated set of parameters [½]
not reflective of risk profile/environment and leads to high capital
requirements [½]
market conditions and overall risk environment may have changed since [½]
e.g. insurers have since adopted better risk mitigation techniques [½]
Marks for other reasonable and well explained points (½ mark per point).
[Marks available 8½, maximum 8]

(iii)
Correct market inefficiencies [½]
Promote efficient and orderly markets; [½]
Protect consumers of financial products; [½]
Maintain confidence in the financial system; and [½]
Help reduce financial crime. [½]
Marks for other reasonable points (½ mark per point).
[Marks available 2½, maximum 2]

(iv)
Note: points in question (iv) should be focused on the wider regulatory regime,
instead of the solvency calculations and capital which is the focus of question (ii),
but there may be some overlap.
Can be argued that market players know the market best compared to regulators [½]
with self-regulations, markets may be able to better respond to changes in
environment/needs [½]
Could argue that a more relaxed regulatory regime may promote innovation [½]
and growth in the industry [½]
existing regime may create barriers to entry and is anticompetitive [½]
existing regime may prohibit foreign investments/wider growth [½]
But self-regulation may erode public confidence in the system, [½]
e.g. due to market failures and the lack of regulatory intervention [½]

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 SA3 ‑ General Insurance ‑ Specialist Advanced – April 2024 - Examiners’ report

without a standard set of regulations, insurers may manipulate figures/hide

issues [½]
there may be less focus on protecting policyholders’ rights [½]
Light touch approach to regulation argued to have contributed to financial crises in
the past [½]
taxpayers may ultimately be left to bear the cost [½]
Dramatically changing regulatory structure will cost regulators and regulated [½]
may have implications on other (non-insurance) regulations [½]
e.g. tax regulations [½]
Could argue that strict rules-based regime intends to promote fair competition and
product innovation, leading to fair premiums [½]
but they could be complex and difficult to interpret [½]
leading to inconsistencies across the market [½]
continual changes in the rules-based regulations are also costly to the industry [½]
also, regulator may not be fully independent and could be influenced by
politicians [½]
Could lead to overall lower cost of compliance [½]
which might translate into lower premiums [½]
Marks for other reasonable and well explained points (½ mark per point).
[Marks available 11, maximum 6]
[Total 18]

Commentary:
Candidates scored well on parts (i) and (iii), as expected as these parts of the question were
straightforward.

For parts (ii) and (iv) which required candidates to generate significantly more points in
order to score full marks, some candidates structured their answers to give both the merits
and demerits of the politician’s statement and suggestion, with the better prepared
candidates typically generating more points and scoring more highly as a consequence.

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 SA3 ‑ General Insurance ‑ Specialist Advanced – April 2024 - Examiners’ report

Q3
(i)
Publicity and public relations, [½]
Promote brand awareness [½]
Part of ESG/CSR initiatives [½]
Required by regulators in some markets [½]
a mandate to increase insurance penetration rates among low-income
households [½]
New market opportunity – increase profits [½]
Gives diversification benefit to existing business [½]
Global company – can utilise existing resources [½]
e.g. technical expertise [½]
e.g. existing relationships with various regulators, reinsurers etc [½]
Strong competition in existing market/business [½]
e.g. if existing business is loss making [½]
Push by shareholders [½]
Increase number of policies [½]
reduce expense loading per policy [½]
Less competition in those markets [½]
potential higher profits [½]
This target market represents large part of the population [½]
Marks for other reasonable points (½ mark per point).
[Marks available 9, maximum 4]

(ii)
Simple/basic products that are easy to understand [½]
products with a standard set of benefits / fixed payments [½]
Clear on what is covered and what is not [½]
but coverage should also be inclusive as possible [½]
Exclusions should be simple and limited [½]
need to weight cost of enforcing and monitoring claims, considering size of
premiums [½]
low / no excess [½]
Premiums are low and affordable [½]
Premiums can be paid in regular payments, e.g. weekly premiums [½]
Sum insureds are low [½]
Features should be suitable for mass distribution [½]
Marks for other reasonable points (½ mark per point).
[Marks available 5½, maximum 3]

(iii)
Tied agents such as banks not suitable [½]
as policyholder may not have bank accounts [½]
poor access to financial infrastructure, payments systems etc [½]

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 SA3 ‑ General Insurance ‑ Specialist Advanced – April 2024 - Examiners’ report

it might not be a focus area for local banks [½]

Internet not suitable as population may have poor access to internet [½]
or illiterate so unable to purchase over the internet [½]
Individual agents not suitable for small premium products as they charge a
percentage of premiums [½]
little incentive for individual brokers to sell low premium products [½]
challenging for agents to visit individual farmers [½]
Marks for other reasonable and well explained points (½ mark per point).
[Marks available 4½, maximum 3]

(iv)
Products can be delivered through local organisations [½]
can reach many policyholders, achieving scale at lower cost [½]
e.g. cooperatives representing farmers, [½]
e.g. small businesses, [½]
e.g. trade unions, [½]
e.g. government institutions, [½]
e.g. micro finance institutions [½]
retention levels may be higher as policyholders may have higher trust in these
local based organisations [½]
Can use technology to ensure distribution is cost effective [½]
e.g. mobile phones to support distribution [½]
easier to communicate with policyholders [½]
Marks for other reasonable points (½ mark per point).
[Marks available 5½, maximum 3]

(v)
Low premium product so important to keep costs as low as possible [½]
Focus on initiatives to limit fraud [½]
Claims handling should be simple and fast [½]
should also be based on a trigger event that’s applicable to whole areas /
communities [½]
parametric insurance [½]
enable reporting via mobile phones [½]
e.g. Using satellite data to monitor vegetation across different regions [½]
when there is visible loss of vegetation, policyholders get pay out [½]
reduce cost of in-person visits to individual farms [½]
e.g. Use level of rainfall as index [½]
when rainfall reaches certain level, policyholder gets pay out [½]
Marks for other reasonable points (½ mark per point).
[Marks available 5½, maximum 3]

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 SA3 ‑ General Insurance ‑ Specialist Advanced – April 2024 - Examiners’ report

(vi)
Note: answer to part (vi) should be relevant to the specifics of the question
(products for low-income populations in developing countries). Do not award
marks for generic list of insurance products.
Livestock insurance – for agriculture community, to protect income and livelihood
of insured from death of livestock. [½]
(Property) Machinery insurance – for any equipment that might be used in the
farming [½]
Personal accident – protects families against accidental injury, disability, or death
for example of single income earner. Can cover funeral expenses which is costly
and a key consideration for low-income populations. [½]
Motorcycle insurance – can provide basic motor insurance coverage but with
low/minimal protections. e.g. protects against cost of repair, medical bills etc which
can be significant. [½]
Marks for other reasonable points (½ mark per point).
0.5 mark for naming a product and
0.5 mark per explanation
[Marks available 2½, maximum 2]

(vii)
Existing historical data can be used but might not be relevant for data for pricing,
reserving, and claims management [½]
Mispricing of the products may lead to [½]
low prices, with high volumes of unprofitable policies [½]
high prices, with very low volumes, not sufficient to cover fixed costs [½]
Low premium products so need to ensure sufficient volumes to ensure profitability [½]
also need large pool of risks as significant claims volatility at per policy level
expected given that limited underwriting can be done [½]
Demand for products could be low due to lack of knowledge, awareness of
insurance [½]
or distrust in insurance companies or companies in general [½]
product design and distribution channel need to be appropriate [½]
teething issues as insurer has little experience in non-traditional distribution
methods [½]
Estimating claims experience – could be higher than expected as company has
limited experience in this market, which could lead to [½]
adverse selection [½]
fraud [½]
Key is to ensure that expenses are kept low, [½]
e.g. claims handling expenses should be kept to a minimum, and at a
reasonable percentage of the premiums [½]
efficiencies and economies of scale will be important [½]
cost of distribution needs to be managed – kept low. [½]
Significant marketing expenses for people not familiar with insurance [½]

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 SA3 ‑ General Insurance ‑ Specialist Advanced – April 2024 - Examiners’ report

Paying insurance claims, e.g. no bank accounts [½]

There may be regulatory barriers, e.g. prohibiting the sale of insurance through non-
traditional distribution channels [½]
might need to engage regulators [½]
Currency risk, where due to movements in the exchange rates between the local
currency and home currency profits might be affected [½]
Unexpected exposure to extreme weather events (CAT losses) [½]
in particular due to the impacts of climate change [½]
Marks for other reasonable points (½ mark per point).
[Marks available 12, maximum 6]

(viii)
General points across (a), (b) and (c):
Points on subjectivity and uncertainty [½]
Eg may need to give a view on uncertainty, eg a range showing best case
scenario vs optimistic and pessimistic [½]
reflecting uncertainty using scenario-based analyses [½]
Points on claims inflation assumptions [½]
Appropriateness of data [½]
Relevance of historical trends [½]
Level of reinsurance [½]
[Marks available 3½, maximum 4]
Specific points across (a), (b) and (c):
(a)
Capital Modelling
Need to assess appropriateness of modelling parameters [½]
Increase in claims variability especially in the tail [½]
impact on correlation assumptions [½]
may impact reinsurance [½]
Existing cat models may not cover regions of the new target market [½]
generally, less data on regions where insurance penetration rates are low [½]
risk not well understood, made worse by climate change [½]
may need to be modelled separately with some simplifications [½]
Consider materiality [½]
how big is this compared to their other business [½]
(b)
Reserving
May need to allow for explicit loads, events not in data [½]
Unearned exposure may have different claims experience [½]
Adjust trends/loss ratios for seasonality [½]
May rely on simple loss ratios methods initially [½]
before moving to experience-based methods like chain ladder [½]
or simple frequency severity methods based on wider industry/market data [½]
(c)

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 SA3 ‑ General Insurance ‑ Specialist Advanced – April 2024 - Examiners’ report

Pricing
adjust loadings to reflect trends, e.g. expenses [½]
unlikely able to reflect uncertainty through additional loads on premiums as
premiums are low [½]
could rely on industry information [½]
e.g. microinsurance products sold by other insurers [½]
May need to rely on subjective judgement initially until more data is available [½]
Marks for other reasonable points across (a), (b), (c) and general remarks (½ mark
per point).
For general points, award maximum 4 marks.
No marks for points repeated across (a), (b) and (c).
[Marks available 14, maximum 9]
[Total 33]

Commentary:
This was the longest question on the exam, with candidates generally scoring better in the
earlier parts of the question, which were typically worth less marks.

The last two parts of the question were worth almost half the question’s total marks:

For part (vii), less well prepared candidates struggled to generate and describe a sufficient
number of challenges in order to score highly. It was also important that candidates
answered in relation to the specific areas of profitability and sustainability.

For part (viii), many candidates were able to score well in one of the three areas of
reserving, pricing, and capital modelling. However, better prepared candidates were able to
demonstrate their knowledge in each of these three broad areas, by generating sufficient
scoring points in all three buckets.

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 SA3 ‑ General Insurance ‑ Specialist Advanced – April 2024 - Examiners’ report

Q4
(i)
Legal costs due to theft or infringement of insured’s intellectual property [½]
Legal costs incurred due to defending against intellectual property claims brought
against the insured [½]
Costs due to liabilities to 3rd parties as a result of infringement [½]
Loss of income due to loss of intellectual property [½]
Expenses incurred following a loss event [½]
Support from experts following a loss event [½]
Marks for other reasonable points (½ mark per point).
[Marks available 3, maximum 2]

(ii)
Annual turnover as a measure of performance of the company, likely size of
loss/lawsuit [½]
Number of copyrights, patents and trademarks held by the company [½]
Income generated from the asset, e.g. higher claims cost if asset drives bottom line [½]
Number of users of the asset, e.g. software with a large number of users are more
likely to be re-created [½]
Past experience, e.g. litigations brought against the company in the past for
infringement [½]
Type of industry. e.g. tech more at risk of intellectual property infringement
compared to clothes manufacturer [½]
Location/region, e.g. some regions more litigious than others [½]
Level of cover purchased, including excess [½]
More difficult to measure factors might be considered and included as part of the
underwriter’s judgement when deciding on the final premium to charge [½]
e.g. company’s internal risk management framework [½]
Marks for other reasonable points (½ mark per point).
½ marks for naming a rating factor and
½ per explanation,
maximum of 1 mark for each rating factor
[Marks available 5, maximum 5]

(iii)
Need to understand the risk that is being insured [½]
type of intellectual property, e.g. copyrights, patents, trademarks, designs,
trade secrets [½]
industry/sector of the insured, e.g. different areas within manufacturing and
tech sectors [½]
geographical location [½]
Claims may be linked to the financial value of the intellectual property, and
estimating this may be challenging [½]
Changing tech landscape might and increasing reliance on tech, [½]

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 SA3 ‑ General Insurance ‑ Specialist Advanced – April 2024 - Examiners’ report

e.g. copying competitors’ smartphone features, increases uncertainty on

likelihood of claims [½]
Claims are likely to be driven cost of litigation, [½]
e.g. defending against patent infringements and taking action against alleged
infringement, and estimating this may be challenging [½]
impact of court inflation [½]
likely to be a long lawsuit [½]
Limited data due to new product and size of the company, [½]
e.g. industry data may be limited and may not have strong working
relationships with reinsurers, brokers etc [½]
May require expert judgement input from SMEs, which is subjective [½]
Marks for other reasonable points (½ mark per point).
[Marks available 7, maximum 6]

(iv)
Diversification effects arise because the various risks/lines of business of a
company’s operations are not perfectly correlated. [½]
Positive diversification effects result in less capital to be held [½]
Extend of diversification allowed for in capital held requires assumptions
about the extent of applicable dependencies [½]
this requires an understanding of various assumptions underlying the
modelling of risks and how they would interact with one another [½]
dependencies can occur between risks in the same class of business [½]
between risks in different classes of business [½]
between policy years [½]
between different risk categories and risk subcategories [½]
Marks for other reasonable points (½ mark per point).
[Marks available 4, maximum 3]

(v)
May provide diversification by line of business but depends on the types of
businesses covered by other policies [½]
There will be diversification because of different nature of the claims [½]
Depends on the industry covered - may have some dependencies with other
industries [½]
possible dependencies between manufacturing and tech sectors [½]
impact of cyber risk across different books [½]
e.g. if company also sells cyber insurance, there could be dependencies with
intellectual property insurance sold to firms that rely heavily on tech [½]
Tail dependencies may look different [½]
e.g. could have strong correlations in the tail between different areas [½]
Marks for other reasonable points (½ mark per point).
[Marks available 4, maximum 4]

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 SA3 ‑ General Insurance ‑ Specialist Advanced – April 2024 - Examiners’ report

(vi)
Proportional method
determines the allocation of capital with reference to a single risk measure [½]
use the selected risk measure to measure the risk of the overall firm and of
each of the individual business units. [½]
allocate the aggregate capital requirement across the various lines of business
in proportion to the value of the risk statistic for the line of business. [½]
scale the resultant allocation, where necessary, to provide an internally
consistent allocation of diversification benefits such that the sum of
individual allocations is equal to the whole [½]
Marginal last in method
based on the capital requirement of each line of business separately as if it
was the last business unit to be added [½]
allocate the overall capital to each line of business in proportion to its
incremental capital requirement thus calculated. [½]
can use a risk measure as a proxy for the capital requirement [½]
Percentile method
based on a certain percentile of the specific class of business or product [½]
may reference a lower percentile than what the capital calculation is based on [½]
to prevent over-allocation to catastrophe-type business [½]
Shapley method
this is an extension to the marginal capital method [½]
based on the game theory [½]
capital is allocated with reference to an average of the marginal capital
requirements [½]
assuming that the class under consideration is added to the overall portfolio
first, second, third, etc [½]
0.5 mark per name of the method
0.5 mark per explanation
[Marks available 7, maximum 2]

(vii)
Gathering sufficient quality data to support these techniques. [½]
Sensitivity to specific assumptions, ensuring robustness. [½]
Selection of appropriate risk measures that are understood and accepted across the
business. [½]
Ensuring consistency with the companies’ broader enterprise risk management
framework. [½]
Communication and interpretation of results of capital allocation across the
business. [½]
Sufficient staff and resources to embed capital considerations in real-time day to
day decision making. [½]
Incorporation of capital loads at a risk level. [½]

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 SA3 ‑ General Insurance ‑ Specialist Advanced – April 2024 - Examiners’ report

Allowance for fixed capital costs such as operational risk that is seldom directly
attributable to specific lines of business. [½]
Help underwriters appreciate the gearing of returns on capital and hence the
significance of pricing terms and conditions. [½]
Convincing senior management of the benefits of return on capital considerations as
a way of enhancing business performance rather than just satisfying regulatory or
risk management requirements. [½]
This relies upon the risk-based measures always remaining relevant, informative,
up-to-date, and timely. [½]
Evolving the methods over time, as understanding of the risk improves. [½]
[Marks available 6, maximum 4]
[Total 26]

Commentary:
This was the final question on the paper and it was evident that some candidates struggled
with time management, appearing to not have sufficient time to answer the question
thoroughly, noting this question is worth more than a quarter of the paper’s total marks.

Better prepared candidates scored well on parts (iii) and (v) of this question in particular.
They demonstrated the breadth of their knowledge by moving from generating scoring points
on claims assessment in part (iii), to points on diversification benefits in part (v), and hence
scored well overall as a result.

[Paper Total 100]

END OF EXAMINERS’ REPORT

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