Examination Guide

P92 Insurance business and finance

Diploma in Insurance

April 2011 Examination Guide

SPECIAL NOTICE
Candidates entered for the October 2011 examination should study this Examination Guide carefully in order to prepare themselves for the examination. Practice in answering the questions is highly desirable and should be considered a critical part of a properly planned programme of examination preparation.

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P92 Insurance business and finance

Contents
Important guidance for candidates Examiner comments Question paper Test Specification Model answers 3 6 8 13 14

Published July 2011 The Chartered Insurance Institute 20 Aldermanbury, London EC2V 7HY Telephone: Fax: Email: 020 8989 8464 020 8530 3052 customer.serv@cii.co.uk

2011 The Chartered Insurance Institute

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IMPORTANT GUIDANCE FOR CANDIDATES

Introduction
The purpose of this Examination Guide is to help you understand how examiners seek to assess the knowledge and skill of candidates. You can then use this understanding to help you demonstrate to the examiners that you meet the required levels of knowledge and skill to merit a pass in this unit. During your preparation for the examination it should be your aim not only to ensure that you are technically able to answer the questions but also that you can do justice to your abilities under examination conditions.

Before the examination

Read the current Diploma in Insurance Information for Candidates
Details of administrative arrangements and the regulations which form the basis of your examination entry are to be found in the current Diploma in Insurance Information for Candidates brochure, which is essential reading for all candidates. It is available online at www.cii.co.uk or from Customer Service.

Study the syllabus carefully

It is crucial that you study the relevant syllabus carefully, which is available online at www.cii.co.uk or from Customer Service. All the questions in the examination are based directly on the syllabus. You will be tested on the syllabus alone, so it is vital that you are familiar with it.

Read widely
It is vital that your knowledge is widened beyond the scope of one book. It is quite unrealistic to expect that the study of a single coursebook will be sufficient to meet all your requirements. While books specifically produced to support your studies will provide coverage of all the syllabus areas, you should be prepared to read around the subject. This is important, particularly if you feel that further information is required to fully understand a topic or an alternative viewpoint is sought. The reading list which can be found with the syllabus provides valuable suggestions.

Make full use of the Examination Guide

The best way to understand what the examiners require is to study the CII Examination Guides. You can purchase copies of Examination Guides online at www.cii.co.uk. CII members can download free copies of past Examination Guides online at www.cii.co.uk/knowledge. You can use this guide as a mock examination paper, attempting it under examination conditions as far as possible and then compare your answers to the model ones. The examiners comments on candidates actual performance in each question should be noted carefully.

Understand the nature of assessment

This Examination Guide contains a full examination paper and model answers. The model answers show the types of responses the examiners are looking for and which would achieve maximum marks. However, you should note that there are alternative answers to some question parts which would also gain high marks. For the sake of clarity and brevity not all of these alternative answers are shown.

Know the structure of the examination

Familiarise yourself with the structure of the examination paper and the time allowed to complete it. This information can be found on the question paper included within this Examination Guide.

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In the examination
Assuming you have prepared adequately, you will only do justice to yourself in the examination if you follow two crucial common sense rules: 1. Spend your time in accordance with the allocation of marks as indicated on the paper. The
maximum marks allocated to each question and its constituent parts are given on the paper; the number of marks allocated is the best indication of how much time you should spend on each question. If a question has just two marks allocated, there are likely to be only one or two points for which the examiner is looking, so a long answer is a waste of time. Conversely, if a question has 12 marks allocated, a couple of lines will not be an adequate answer. Always remember that if the paper is not completed, your chances of passing will be reduced considerably. Do not spend excessive time on any one question; if the time allocation for that question has been used up, leave some space, go on to the next question and only return to the incomplete question after you have completed the rest of the paper, if you have time.

2. Take great care to answer the precise question set.

The model answers provided in this Examination Guide are quite focused and precise; alternative answers will only be acceptable if they still answer the question. However brilliantly a candidate writes on a particular topic, if it does not provide a satisfactory answer to the precise question as set, the candidate will not achieve the marks allocated. Many candidates leave the examination room confident that they have written a good paper, only to be mystified when they receive a disappointing result. Often, the explanation for this lies in a failure to think carefully about what the examiner requires before putting pen to paper.

Order of tackling questions

Tackle the questions in whatever order feels most comfortable. Generally, it is better to leave any questions which are felt to be very challenging until the more familiar questions have been attempted, but remember not to spend excessive time on the questions you are most confident about.

Answering different question parts

Always read all parts of a question before starting to answer it, otherwise, you may find that after answering part (a), the answer you have given is really more appropriate to part (b) and it would be necessary to duplicate much of what has already been written. The examiners will normally only give credit for an answer if it is contained within its correct question part.

Handwriting
Provided handwriting is legible, candidates will not lose marks if it is untidy. We strongly recommended that candidates do not write in block capitals, because they will be slowed down so much by doing so.

Answer format
Unless the question requires you to produce an answer in a particular format, such as a letter or a report, you should use bullet points or short paragraphs, since this allows you to communicate your thoughts in the most effective way in the least time. The model answers indicate what is acceptable for the different types of question.

Calculators
If you bring a calculator into the examination room, it must be a silent battery or solar-powered non-programmable calculator. The use of electronic equipment capable of being programmed to hold alphabetical or numerical data and/or formulae is prohibited. You may use a financial or scientific calculator, provided it meets these requirements. It is important to show all the steps of your calculation in your answer. The examination is testing your ability to carry out all the appropriate steps in calculating a value. A proficient mathematician is someone who follows the correct method, i.e. carries out the appropriate steps. The majority of the marks will be allocated for demonstrating the correct method of calculation.

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After the examination

All examiners who mark Diploma in Insurance answer books are either active practitioners in the insurance industry or are experts on the subject. They have been specially trained to mark papers using a detailed marking scheme; the model answers in examination guides are based on those marking schemes. The marking of each Examiner is closely monitored by the Senior Examiner throughout the marking period and all marked answer books are carefully checked. This process means all answers books are marked to the same standard. After all the answer books have been marked, a moderation meeting is held, at which all available statistical information is considered, together with the views of the Senior Examiner and other assessment experts. At the meeting a pass mark is set which should ensure that the standard of knowledge and skills required to pass the paper is comparable with that of previous papers. All candidates at or above the agreed mark will pass: the CII does not operate a quota system whereby only a fixed percentage of candidates can pass a paper.

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EXAMINER COMMENTS
Question 1 This question was generally well answered by candidates, with the main areas covered. Many candidates were aware of regulatory training that needed to be completed but did not pick-up on the legal training that is also a key part of this. Question 2 The majority of candidates had a fair understanding of this area, with good awareness of the acceptable risks. Many candidates confused the answer by going into full discussion on the types of risk acceptable to a company, rather than focussing on the areas for consideration. The better candidates demonstrated knowledge of how the probability of loss is considered. Question 3 This question was not well answered by candidates, with many confusing the different ratios. Good candidates understood that the profitability ratio is calculated through either the return on equity or combined ratio. In part (b) the majority of candidates got this the wrong way round; indicating that a high solvency ratio would indicate the company has debt problems, as opposed to the correct answer which would be that this indicates a strong financial position. Question 4 This question was generally well answered by the majority of candidates, with a good overall understanding of the different types of budget and the differences between fixed and flexible budgets. Question 5 This question had mixed results in both parts. Many candidates demonstrated an understanding of what business ethics were in part (a). Part (b) however, was less well answered; the better candidates demonstrated a good knowledge of how managers promote the interest of employees and affect the culture of the organisation to the extent that they all demonstrate the same ethics. Question 6 The majority of candidates had a good understanding of this concept, with clear understanding of areas covered by a public relations area of a marketing team. Many candidates understood how the activity linked into other areas of marketing activity. Question 7 This question was not answered well overall. Those candidates that achieved higher marks showed a clear understanding of the full connections between the four perspectives and how they would lead to an increase in shareholder value. Question 8 The results of this question were mixed, many candidates understood what each ratio was, however, they turned the ratio upside down and therefore got an incorrect answer. The better candidates understood the meaning of each ratio and interpreted the results from the calculations correctly. For example the debtors ratio demonstrates how often the debt is turned over in a year, and therefore gives an indication of how long it takes for debts to be collected. Question 9 The majority of candidates identified the correct model that this question examines, and were able to provide a good example of how this works. A number of candidates confused this with the product life cycle model. Question 10 The majority of candidates demonstrated a good understanding of the data protection in part (a). Part (b), had mixed results, many candidates demonstrated the rules provided for the protection of individuals, but did not comment on the consequences of not adhering to these, such that the individuals can be held liable and fined or prosecuted.

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Question 11 Part (a) of this question was well answered by all candidates. The majority of candidates were able to demonstrate that this gives an indication of the value of the company, but they did not comment on the accounting equation being the basis of double entry book keeping. Question 12 Candidates demonstrated a good understanding of this question, with good identification of the three main components the balance sheet, the income statement and cash flow statements. Question 13 This question was not well answered. Part (b) had better answers than part (a) with the majority of candidates understanding in part (a) that professionalism of accountants and actuaries was essential. Question 14 This question was generally well answered by candidates. A good answer would have demonstrated an understand of the key areas for the finance director and included an understanding of the part they play in assessing risk and levels of capital required for the company. Question 15 The majority of candidates answered this question well, candidates showed a better understanding of parts (b) and (c) with the better candidates able to answer part (a) as well, showing an understanding of all the areas of registered companies obligations. Question 16 This question was generally well answered by candidates. Those showing a better understanding fully understood the link between existing key players and the need to identify the skills required for the future. Question 17 This question was not well answered by candidates; the better candidates understood the reason for Solvency II compared to Solvency I and how this linked to risk management systems. Question 18 Many candidates answered this question well, with a good understanding of the disadvantages of outsourcing. Question 19 This question had mixed results, with the better candidates demonstrating a good understanding of the reasons for minutes in meetings and that they include a demonstration not only of the decisions made but how these decisions were made. Question 20 This question was well answered by the majority of candidates, with a good understanding of the main components of the Working Time Regulations 1998 including the maximum numbers of hours a week, and the individuals ability to opt out of this.

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THE CHAR RTERED IN NSURA ANCE E INST TITUT TE

P92 2
Dipl loma a in Insur ranc ce
Unit P92 P In nsuranc ce bus siness and a fin nance
April 2011 exam mination

Instructio ons
lowed for this s paper. Three hours are all Do not t begin writi ing until the e invigilator instructs yo ou to. t instructi ions on pag ge 3 carefully y before ans swering any y questions. . Read the e the informa ation request ted on the an nswer book and a form B. Provide re allowed to write on the e inside page es of this que estion paper, but you mus st NOT write e your name, , You ar candidate number, PIN or any other o identific cation anywh here on this question q pap per. swer book and this ques stion paper must m both be e handed in personally by you to th he invigilator r The ans before you y leave th he examinati ion room. Failure F to co omply with this regulation will res sult in your r paper not n being marked and you y may be prevented from f enterin ng this exam mination in the future.

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Unit P92 Insurance business and finance

Instructions to candidates
Read the instructions below before answering any questions
Three hours are allowed for this paper, which contains 20 compulsory questions and carries a total of 200 marks. Read carefully all questions and information provided before starting to answer. Your answer will be marked strictly in accordance with the question set. The number of marks allocated to each question part is given next to the question and you should spend your time in accordance with that allocation. You may find it helpful in some places to make rough notes in the answer booklet. If you do this, you should cross through these notes before you hand in the booklet. It is important to show each step in any calculation, even if you have used a calculator. If you bring a calculator into the examination room, it must be a silent battery or solar-powered non-programmable calculator. The use of electronic equipment capable of being programmed to hold alphabetic or numerical data and/or formulae is prohibited. You may use a financial or scientific calculator, provided it meets these requirements. Answer each question on a new page. If a question has more than one part, leave six lines blank after each part.

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Answer ALL questions. Note form is acceptable where this conveys all the necessary information.

1.

Describe briefly four key areas that training programmes need to cover.

(8)

2.

List and explain briefly three considerations that should be included in an insurance companys risk appetite statement.

(6)

3.

(a)

State the formulae for the following three ratios used for insurance company analysis: (i) (ii) (iii) Solvency ratio; Liquidity ratio; Profitability ratio. (2) (2) (4) (2)

(b)

Explain briefly what a high solvency ratio figure would indicate.

4.

(a) (b)

Define the term budget. (i) (ii) List three methods of budgets in addition to fixed and flexible budgets. List two advantages to budgeting.

(2) (3) (2) (4)

(c)

Explain briefly the difference between fixed and flexible budgets.

5.

(a) (b)

Define the term business ethics. Explain how business ethics play a central part in management.

(3) (11)

6.

Identify five tasks that a public relations team within a marketing department will generally undertake.

(10)

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7.

(a) (b)

State the four perspectives of the balanced scorecard. State the relevant questions which need to be asked within the perspectives to help shape the vision and strategy of the company. Summarise how the four perspectives link together to ensure business objectives are met.

(4)

(4)

(c)

(4)

8.

Using the following data, calculate the stock turnover, debtors and creditors ratios, and state what each means to the company. 360 100 20 120 240 600

(12)

Total cost of sales Debtors Creditors Average stock Total purchases Total sales

9.

Explain the Lifecycle Model used to assess the level of expectation the business can expect from a customer throughout the customers relationship. Your answer should include an example and a diagram.

(10)

10.

(a) (b)

Outline why the UKs data protection legislation was introduced. Describe briefly three consequences of this legislation.

(4) (6)

11.

(a) (b)

State the accounting equation and define each element. Explain the purpose of the accounting equation.

(6) (4)

12.

Identify and explain the three main financial statements required in published financial accounts.

(9)

13.

(a) (b)

List the six strategic aims of the Financial Reporting Council (FRC). State four other operating bodies that work with the FRC.

(6) (4)

Questions continue over the page.

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14.

Describe briefly five activities that a finance director would be responsible for in a large organisation.

(10)

15.

(a)

List the four key requirements for public limited companies, under the Companies Act 2006. State the three statutory functions of Companies House. List the documents every registered company is legally obliged to submit to Companies House.

(4) (3)

(b) (c)

(3)

16.

Succession planning begins with a review of an organisations business strategy. List five other steps an organisation will take during this process.

(10)

17.

Following the changes to be made within the EU Solvency II Directive, explain the requirements of an actuary in an insurance company.

(9)

18.

Outline five disadvantages of outsourcing.

(10)

19.

(a) (b)

Explain the importance of taking minutes at company board meetings. State who is ultimately responsible for taking these board minutes.

(7) (2)

20.

Outline five of the principal provisions of the Working Time Regulations 1998.

(10)

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TEST SPECIFICATION
Question 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 April 2011 Examination P92 Insurance business and finance Syllabus learning outcome(s) examined 4 - Understand other common functions within insurance organisations 8 - Understand the financial strength of insurance companies 7 - Understand the use of financial ratios to assess businesses 2 - Understand the management of insurance businesses 1 - Understand the structure of the insurance business 4 - Understand other common functions within insurance organisations 2 - Understand the management of insurance businesses 7 - Understand the use of financial ratios to assess businesses 1 - Understand the structure of the insurance business 3 - Understand the main aspects of corporate governance 5 - Understand the main accounting principles and practices 5 - Understand the main accounting principles and practices 3 - Understand the main aspects of corporate governance 6 - Understand the main practices of insurance company accounts 2 - Understand the management of insurance businesses 3 - Understand the main aspects of corporate governance 4 - Understand other common functions within insurance organisations 8 - Understand the financial strength of insurance companies 1 - Understand the structure of the insurance business 3 - Understand the main aspects of corporate governance 4 - Understand other common functions within insurance organisations

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NOTE ON MODEL ANSWERS The model answers given are those which would achieve maximum marks. However, there are alternative answers to some question parts which would also gain high marks. For the sake of clarity and brevity not all of these alternative answers are shown. An oblique (/) indicates an equally acceptable alternative answer.

Model answer for Question 1 Induction essential training for new recruits, what they need to know about the company and basic skills to do the job. Skills development for the job main skills training to do the current job. Skills development for the person training required to acquire skills to do the next job for those individuals with career aspirations. Legal and regulatory training training required to ensure all individuals have the relevant levels of competence to do the role in-line with Financial Services Authority requirements and other legal requirements.

Model answer for Question 2 Any three of the following: A list of the risks acceptable for the company to bear. A list of risks that are not acceptable for the company to bear. The maximum value/exposure that is deemed acceptable. The risk acceptance criteria required for appropriate re-insurance. The use of co-insurance and how this can enable exposure control. Probability of loss e.g. 1 in 200.

Model answer for Question 3 (a) (i) (ii) (iii) Solvency ratio = net assets/earned premium net of reinsurance. Liquidity ratio = total liabilities/cash + investments. Profitability ratio = ROE = profit after tax/shareholders equity (capital) x 100 or Combined ratio = claims + expenses + acquisition costs/earned premium net of reinsurance x 100.

(b)

The higher the figure would indicate that the company is stronger, alternatively this could show that a high level of capital is required to support its turnover and is usually seen as over-capitalised.

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Model answer for Question 4 (a) A financial or quantitative statement prepared in advance of a specified accounting period. Usually covering a short period of months or normally up to a year. (i) Any three of the following: Top-down budgeting; bottom-up budgeting, zero-based budgeting and rolling budgets. Any two of the following: Unification of effort, planning, motivation, control, financial awareness and basis of comparison. Fixed budgets are not changed once set regardless of any chance in market forces etc; projected figures are compared against actual figures at the end of the budgeting period. Flexible budgets can be altered at any time to reflect unexpected changes.

(b)

(ii)

(c)

Model answer for Question 5 (a) The standards and conduct that a business sets itself in its organisation and outside, within the business and social environment. How the managers use that revenue can have implications on the wellbeing of the countries in which they operate. How management promotes the interest of employees and take decisions that affect whole communities. The management will be judged on the way they handle ethical and environmental issues. Managers will have to consider any decisions they make, the cultural aspects of society and what would be considered morally acceptable. Managers actions/board cascade ethics so it permeates to the rest of the business and staff.

(b)

Model answer for Question 6 Any five of the following: Motivating the workforce by fostering pride in its public image. Handling a specific problem e.g. health scare. Building or maintaining the corporate image. Supporting brand values. Sponsorship activity. To influence particular market segments. To support other marketing campaigns, such as advertising. Assist in the launch of a new product.

Model answer for Question 7 (a) Financial perspective. Internal perspective. Learning and growth. Customer perspective. To succeed financially, how should we appear to our shareholders/stakeholders? To satisfy our stakeholders and customers, what business processes must we excel at? To achieve our vision, how will we sustain our ability to change and improve? To achieve our vision, how should we appear to our customers?

(b)

(c)

Balanced scorecards identify the knowledge and skills (learning and growth) that employees need to build the right efficiencies (internal perspective) to deliver specific value to the market place (customer perspective) and therefore deliver the companys strategy and increase the shareholder value (financial perspective).

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Model answer for Question 8 Stock turnover = 360/120 = 3 This means the company keeps its stock on average for four months, which could lead to cash being tied-up in stock. Debtors ratio = 600/100 = 6 This means that the debt is turned over six times a year, therefore on average debts are paid within 60 days. Creditors ratio = 240/20 = 12 This means the credit turnover is 12 times a year which means our average credit terms with suppliers is 30 days.

Model answer for Question 9 This model assesses the whole lifetime relationship of a customer, and allows an understanding of the potential financial value of the customer to the organisation. For example supermarket or car insurance by age 20, retain customer worth x throughout life time. Looks at a customer throughout their lifetime/end-to-end basis, and requires the building of a successful relationship. Long-term profitability

Customer retention (cheaper to retain a customer than get a new customer.)

Quality of relationship (why go elsewhere?)

Customer service (supplier service is key every time a customer interacts with the company, it is an opportunity to build the relationship further.)

Model answer for Question 10 (a) The UKs data protection legislation governs protection of personal data of individuals information. It also provides a way for individuals to enforce control on information about them; prevents miss-use/loss of data and retains data subject confidentiality. Any three of the following: Directors, managers etc can be held liable for offences committed by their organisations or sued, or get fined. Individuals can go through the courts if they believe their rights have been breached. Individual data can only be transferred to non-EU nations if certain conditions are met. Requests made on behalf of third parties, to determine criminal or medical histories, are forbidden. Set of rules were provided for the protection of customers.

(b)

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Model answer for Question 11 (a) Equity = Assets Liabilities. Equity this is the amount of cash available either through investment cash or profit. Assets (tangible or intangible) i.e. any physical property or right that has a monetary value that is owned by the organisation. Liability is any amount owed by the organisation. (b) It is a way of looking at financial transactions and explaining how income and expenditure relate to the value of the company. It forms the basis of the accounting entries that make-up the profit and loss and balance sheet. It sets the principle of double entry and ensures that the books balance.

Model answer for Question 12 Income statement (also known as profit and loss statement) shows the results of the company as a consequence of the income generated and expenditure occurred during the accounting period. It demonstrates any profit or loss made. Balance sheet statement of financial position at a specific point in time/it shows what the company owns and what it owes, listing all the assets and liabilities. Cash flow statements shows the sources and uses of cash and is an indication of company liquidity.

Model answer for Question 13 (a) Corporate governance, corporate reporting, auditing, actuarial practice, professionalism of accountants and actuaries and Financial Reporting Council effectiveness. Any four of the following: Accounting Standards Board, Financial Reporting Review Panel, Accounting Practice Board, Board for Actuarial Standards and Professional Oversight Board.

(b)

Model answer for Question 14 Any five of the following: Complete and assess economic capital model to determine appropriate level of capital for the company. Determine extent of risk by completing stress and scenario testing. Proposals to board on equity to hold in addition to equity capital. Preparation and recommendations on the amount of dividends to pay to shareholders. Preparation of statutory accounts. Preparation of financial information required by the Financial Services Authority. Preparation of information for rating agencies. Management of investment portfolio. Management of internal finances e.g. budget process, planning and forecasting etc. Ensure provision of claims is sufficient.

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Model answer for Question 15 (a) Company formation, statutory reporting, company meetings and responsibilities of a companys directors and officers. To incorporate and dissolve companies, to examine and hold document under the Companies Act and to make this information available to the public. All registered companies are obliged to provide Companies House with an up-to-date annual return and in most cases, annual accounts and a directors report/statement.

(b)

(c)

Model answer for Question 16 Any five of the following: Identify the key jobs necessary to achieve strategic goals. Identify the extent to which these jobs may change or new ones created. Identify the performance factors critical to success in these jobs. Establish the current key people. Prepare a list of all the skills of the current key people. Establish a timetable for when you would expect these key people to leave the organisation. Establish a means of identifying current skills of potential successors to your key people. Recruit as necessary. Train current employees.

Model answer for Question 17 Currently under the Financial Service Authority this applies to life companies only, nothing is prescribed for non-life companies. The directive requires all insurance firms to have an actuarial function. They may not need formal actuarial qualifications, but will need sufficient knowledge of financial mathematics. The new actuarial function must contribute to companys effective implementation of risk management systems; in particular this must have a feedback loop to ensure continual improvement of the model. The model should be used to assess the companys technical provisions.

Model answer for Question 18 Any five of the following: Certain control and direction will be lost. Even if damages can be awarded for poor service, business will lose out as customers will not understand why you need to outsource and damage to reputation is difficult to reverse. Risk that confidential information will be lost or leaked to outsiders, as external parties would not understand the importance of this information. Businesses can become too dependent on the outsourced arrangement and then when costs increase, they cannot control with a cheaper internal option. If outsourcer has financial problems, business is forced into situation of finding an alternative outsourcer. Full understanding of customer behaviour and satisfaction can be lost if communication between outsourcing company and the business is poor. Fear of redundancy and consequent lowering of morale. Company is still liable for data and cannot negate regulatory responsibility.

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Model answer for Question 19 (a) There is a legal requirement, defined in the Companies Act, that minutes must be prepared and kept for ten years. They should be for any board meetings where significant business decisions are made. They record how the decision came about, what final decision was reached and who is responsible for any action. Their permanence in writing reduces the possibility of dispute. They are normally the responsibility of the company secretary or a secretarial assistant. However, in their absence, the task can be allocated to anyone who attends the meeting.

(b)

Model answer for Question 20 Any five of the following: A limit of the average weekly working time to 48 hours, although individuals can choose to work longer. A limit on night workers average normal daily working time to eight hours. A requirement to offer health assessments to night workers. Minimum daily and weekly rest periods. Rest breaks at work if working longer than six hours. Paid annual leave. A worker is entitled to a rest period of 11 consecutive hours between working days. A worker is entitled to a rest period of not less than 24 hours in a seven day period. A higher level of rights for adolescent workers.

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