April 2022 Chief Examiners' Report - Associateship - Chartered Insurance Institute of Nigeria - PDF

Chartered Insurance Institute of Nigeria Chief Examiners’ Report April 2022 Associateship (A01-A09) Page 1 of 153 Page 2 of 153  LOGO CHARTERED INSURANCE INSTITUTE OF NIGERIA ASSOCIATESHIP...

Chartered Insurance Institute of Nigeria Chief Examiners’ Report April 2022 Associateship (A01-A09) Page 1 of 153 Page 2 of 153  LOGO CHARTERED INSURANCE INSTITUTE OF NIGERIA ASSOCIATESHIP APRIL 2022 DIET EXAMINATION PAPER SUBJECT A01 RISK, REGULATION AND CAPITAL ADEQUACY All answers are to be written on the answer booklet(s) supplied in accordance with the following instructions: Three hours are allowed for this paper. Fill in the information requested on the answer booklet and on form B. Handle the answer booklet with care. Do not write on the question paper. The answer booklet should be handed over personally by you to the invigilator before you leave the Examination Hall. Insert your candidate’s number as given on your admission permit and any other particulars required on the cover and flap of the answer booklet. Ensure that you write the full and correct candidate’s number. No name should be written on any leaf of the book, or on any supplementary leaves that may be issued to the candidates. The answer to each question must be commenced on a separate page. Where however, a question consists of two of more parts, this instruction do not apply to the separate parts. Write in the ruled margin the number and question attempted. Leave no blank pages among your answers. Where supplementary leaves are used, the candidate’s number should be written in the space provided on them and fastened at the end of the book inside the cover. FAILURE TO ADHERE TO INSTRUCTIONS (WRITTEN AND VERBAL) WILL ATTRACT STATED SANCTIONS AS STATED IN THE APRIL 2022 DIET CANDIDATES’ INSTRUCTIONS. Page 3 of 153  CHARTERED INSURANCE INSTITUTE OF NIGERIA A01 – RISK, REGULATION AND CAPITAL ADEQUACY INSTRUCTIONS TO CANDIDATES Three hours are allowed for this paper. You should answer all questions in Part I, the compulsory question in Part II and three out of the five questions in Part III. The paper carries a total of 200 marks distributed as follows: Part I 8 Compulsory Questions 48 marks Part II 1 Compulsory Question 50 marks Part III 3 Optional Questions 102 marks. You are advised to spend not more than 45 minutes on Part I and strongly advised to attempt ALL the required questions to score maximum possible marks. Where a question is split into parts (a), (b), etc, marks for each part are only shown if they are split unevenly between the parts and you should spend your time in accordance with the allocation. In attempting the questions, you may find it helpful in some places to make rough notes in the answer booklet. If you do this, you must cross through these notes before you hand in the booklet. A formula sheet will be issued for use with this paper. It is important to show each step in any calculation, even if you have used a calculator. Answer each question on a new page. If a question has more than one part leave several lines blank after each part. Page 4 of 153 Chief Examiner’s Comments Question 1 This question tested the candidates’ knowledge on re-insurance, especially the facultative type. About 97% of the candidates attempted this question while 60% of them scored above average score. Question 2 The question was intended to test the candidates’ knowledge on normal distribution, 86% of the candidates that attempted the question scored above average. Question 3 All the candidates attempted the question and performed above average. It was a good performance. Question 4 This question tested the knowledge of the candidates on sampling method in Insurance Company, 80% of the candidates that attempted the question performed very well. Question 5 The question attempted to test the candidates’ knowledge of understanding in practical Insurance, ordinarily, it was expected that candidate at that level would find the question very simple. More than 99.8% of the candidates’ answered the question and less than 60% of the candidates’ passed the question, despite its simplicity. Question 6 This question was to test the candidates’ understanding on the risk identification, description and estimation. More than 70% of the candidates who attempted the question performed above average. Question 7 The question is simple enough, even pupils at lower levels can give correct answer to it; but it seems the candidates need to be serious in order to enhance their performance. The performance in this question is below average. Question 8 The question was intended to test the candidates’ knowledge on underwriting, underwriting authority and binding authority. The performance of the candidates’ is fair and encouraging. Question 9 The first part of the question was on the industry practice as for regulation. 95% of the candidates that answered the question did well and 50% of them scored above pass mark. The second part was on probability usefulness in insurance and important aspect of the Page 5 of 153 course, 90% of the candidates had challenges with the probability due to wrong counting. Generally, the performance was good. Question 10 The question tested the knowledge of candidates on statistics, the performance showed that all the candidates attempted the question performance was above average. Question 11 More than 50% of the candidates’ did not attempt this question at all, and among those that answered the question, their performance was relatively below average. Question 12 This question required the candidates to justify the use of financial rating agencies by the insurance companies and procedures for conducting rating process between the insurance companies. About 72% of the candidates’ attempted the question while about 65% did well, but the candidates’ would not explain the rating process. Question 13 This question was intended to examine the knowledge of the candidates on proposal form and ways of preparation of proposal. 86% of the candidates that attempted the question did very well, and it showed that the candidates really understood the question. Question 14 The question intended to assess the knowledge of the candidates on regression analysis but the performance is below average. More than 50% of the candidates who attempted the question scored below average. Comments on Overall Performance: Overall performance of the candidate is 40% which is not encouraging; the candidate can perform very well if they really study hard, because the question was moderate enough for this level. Suggestion(s) on Improvement (if any): Candidates should study hard in order to perform very well in this course. Also candidates are advised to prepare adequately before attempting future examinations of the Institute. Page 6 of 153  RISK, REGULATION AND CAPITAL ADEQUACY A01 Part I Answer ALL questions in Part I. Each question carries six (6) marks. 1. a) What is facultative reinsurance? (2 marks) b) Facultative reinsurance has both advantages and disadvantages over treaty reinsurance. Enumerate two (2) of each. (4 marks) Solution a) Facultative reinsurance is the placement and acceptance of business on an individual basis depending on its merit. Therefore, in a facultative reinsurance, there is no obligation on both the direct office and reinsurance company to place nor accept the risk being placed. (2 marks for correct and full definition) b) Advantages of facultative reinsurance over the treaty: – It is the last resort once the treaty capacity is fully exhausted. – It is specifically designed for hazardous risks. – It is highly flexible in the sense it could be put in place for any risk. – No binding obligation on both parties (1 mark for each correctly stated advantage. Total: 2 marks) Disadvantages of facultative reinsurance over the treaty – It is very cumbersome in administration – Acceptance is not automatic – Possibility of leakages in vital information to competitors – Possibility of loss of goodwill (1 mark for each correctly stated advantage. Total: 2 marks) 2. a) What is a “normal distribution”? (2 marks) b) Enumerate four (4) characteristics of a normal distribution. (4 marks) Solution (a) A normal distribution is a continuous probability distribution which can assume any value. (2 marks) (b) Characteristics of a normal distribution are: It is a continuous distribution The mean () lies at a point under the peak of the curve It is symmetrical (ie has both the two tails or sides exactly alike) In some specific areas under curve, there lie certain standard deviations above and below the mean (). The two tails of the curve do not touch the horizontal axis theoretically. The mean () is zero, while the standard deviation () is one for a standard normal distribution. It is bell shape The area under the normal distribution graph Page 7 of 153 (1 mark each for any correctly stated characteristic. Maximum of 4 characteristics to be graded. Total: 4 marks) 3. (a) The mean, median and mode has an empirical relationship between them. Write it out. (4 marks) b) What is a unimodal distribution? (2 marks) Solution a) Mean – Mode = 3 (Mean – Median) (4 marks) b) A unimodal distribution is a distribution where a single mode exists. (2 marks) 4. Quantitative analysis has some sampling techniques. Enumerate any six (6) of these. Solution The following are sampling techniques in quantitative analysis: i) Random Sampling ii) Stratified Random Sampling iii) Systematic Sampling iv) Cluster Sampling v) Double Sampling vi) Expert Sampling vii) Purposive Sampling viii) Convenience Sampling ix) Quota Sampling (1 mark for each correctly stated technique. Maximum of 6 to be graded. Total: 6 marks) 5. (a) List four (4) generic meanings of a risk in insurance. (4 marks) b) Distinguish between moral and physical hazards. (2 marks) Solution a) The four generic meanings of risk in insurance: (i) Risk as the main cause of an undesired outcome (ii) Risk as the object (i.e. the subject matter of insurance) (iii) Risk as the probability of an undesired event taken place (iv) Taking a risk by not putting in place what a reasonable man. (1 mark for each correctly stated point. Maximum of 4 to be graded. Total: 4 marks). b) Moral hazard relates to the attitude of the insured while physical hazard has to do with the physical feature(s) or characteristic(s) of the risk. (1 mark for each correctly stated distinguishing point. Total: 2 marks). 6. Describe the following in relation to risk analysis: (a) Risk Identification; (b) Risk Description; (c) Risk Estimation? Page 8 of 153 Solution (i) Risk Identification: This is a systematic way of identifying all the activities that may expose the organization to various risks. (ii) Risk Description: This is the explicit description of all the risks identified under the risk identification stage in a way that would be readily understood by all the stakeholders (iii) Risk Estimation: These are the estimates both in terms of quantitative & qualitative values (i.e. frequency of occurrence and impact level) to the organization. Usually in risk estimation, criteria such as H – M – L (H – stands for High; M – stands for Medium or Middle and L – stands for Low) may be employed in describing the estimate values or attributes. (2 marks each for correctly explained term. Total: 6 marks) 7. (a) Enumerate any three (3) methods of data presentation. (3 marks) (b) Define relative frequency? (3 marks) Solution: a) The methods of data presentation are: (i) Pictogram (ii) Tables (iii) Charts/diagrams (iv) Graphs. (1 mark each for any correctly stated method) b) Relative frequency is the ratio of the frequency (f) procedures or stages involved in the rating of a particular class limit to that of the total frequency of the whole data given. (i.e. the frequency of a class divided by the total sum of all the frequencies). Furthermore, relative frequency is usually expressed as a percentage. (2 marks for any correctly stated definition and 1 mark a further description (i.e. it is usually expressed as a percentage). Maximum of 3 marks in total. 8. (a) Define underwriting? (2 marks) (b) Distinguish between “binding authority” and “underwriting authority” (4 marks) Solution a) Underwriting is a process of determining whether or not the risk proposed for insurance should be accepted, and if it is to be accepted at what premium rates, terms & conditions. (2 marks for correct and full definition) b) “Binding Authority” gives the direct brokers and reinsurance brokers the authority to accept risks on behalf of the insurer/reinsurer and place the risks accepted with them; while “Underwriting Authority” is the level of authority granted by an insurance company within certain predefined limits to the insurance intermediaries (such as the insurance brokers) to be involved in the underwriting process. It may equally be granted by the reinsurer to the insurance companies and reinsurance broking firms. (2 marks for each correct and full definition. Total: 4 marks) Page 9 of 153 Part II Compulsory Question. This question carries 50 marks. 9. (a) As part of NAICOM’s role to establish standards for the conduct of insurance business in Nigeria, a circular was issued to Industry Practitioners on “fair trade practice and fair treatment to customers. Enumerate any two (2) of the stated minimum information that insurance institutions are required to update their websites as stated in the circular. (10 marks) (b) What do you understand by the term “probability”? (2 marks) (c) A pair of dice is tossed. (i) Draw the sample space. (5 marks) (ii) What is the probability that the sum of the two dice which appeared is eleven? (3 marks) (iii) What is the probability that both dice showed the same number? (3 marks) (iv) What is the probability that the sum of both dice gives a sum of at least nine? (3 marks) d) A fair coin is tossed four times. You are required to: (i) Construct a sample space for the four tosses of the coin. (10 marks) (ii) List out all the possible outcomes of the experiment. (8 marks) (iii) What is the probability of obtaining at least two heads? (3 marks) (iv) What is the probability of more heads than tails? (3 marks) Solution a) As part of NAICOM’s role to establish standards for the conduct of insurance business in Nigeria, a circular was issued to Industry Practitioners on “fair trade practice and fair treatment to customers. The stated minimum information that insurance institutions are required to update their websites as stated in the circular major focus in the circular are: the average timeline to settle claims (for various classes of insurance) business location and contact telephone number of all its branches the complaint procedure. (5 marks for any correctly stated point. Maximum of 2 to be graded. Total: 10 marks) b) The Probability of an event (E) occurring may be defined as the ratio of the number of times event (E) can occur to the total number of possible outcomes. Thus, P(E) = Number of times event E can occur Total number of possible outcomes Page 10 of 153 In other words, the probability of any event is obtained by dividing the number of time(s) that the event can occur with the total number of possible outcomes. Probability ranges from 0 to 1. (2 marks for stating the correct formula. Total: 2 marks) c) A pair of dice is tossed. The construction of the sample space table is as shown below: 1 2 3 4 5 6 1 1,1 1,2 1,3 1,4 1,5 1,6 2 2,1 2,2 2,3 2,4 2,5 2,6 3 3,1 3,2 3,3 3,4 3,5 3,6 4 4,1 4,2 4,3 4,4 4,5 4,5 5 5,1 5,2 5,3 5,4 5,5 5,6 6 6,1 6,2 6,3 6,4 6,5 6,6 (3 marks for the correctly completed table. Total: 5 marks) # (i) 1 2 3 4 5 6 1 1,1 1,2 1,3 1,4 1,5 1,6 2 2,1 2,2 2,3 2,4 2,5 2,6 3 3,1 3,2 3,3 3,4 3,5 3,6 4 4,1 4,2 4,3 4,4 4,5 4,5 5 5,1 5,2 5,3 5,4 5,5 56 6 6,1 6,2 6,3 6,4 6,5 6,6 Probability that the sum of the two dice which appeared is eleven = 2/36 = 1/18 (3 marks) (ii) 1 2 3 4 5 6 1 1,1 1,2 1,3 1,4 1,5 1,6 2 2,1 2,2 2,3 2,4 2,5 2,6 3 3,1 3,2 3,3 3,4 3,5 3,6 4 4,1 4,2 4,3 4,4 4,5 4,5 5 5,1 5,2 5,3 5,4 5,5 5,6 6 6,1 6,2 6,3 6,4 6,5 6,6 Probability that both dice showed the same number= 6/36 = 1/6 (3 marks) (iii) 1 2 3 4 5 6 1 1,1 1,2 1,3 1,4 1,5 1,6 2 2,1 2,2 2,3 2,4 2,5 2,6 3 3,1 3,2 3,3 3,4 3,5 3,6 Page 11 of 153  4 4,1 4,2 4,3 4,4 4,5 4,5 5 5,1 5,2 5,3 5,4 5,5 5,6 6 6,1 6,2 6,3 6,4 6,5 6,6 Probability that the sum of the two dice is at least nine = 10/36 = 5/18 (3 marks) d) A fair coin is tossed four times. You are required to: (i) Construct a sample space for the four tosses of the coin. H H T H H T H T H H T T T H T H H H T T H T T H H T T T H T (2½ marks for each correctly shown horizontal space/diagram. Total: 10 marks.) (ii) List out all the possible outcomes of the experiment, say X,. {X} = {HHHH, HHHT, HHTH, HHTT, HTHH, HTHT, HTTH, HTTT, THHH, THHT, THTH, THTT, TTHH, TTHT, TTTH, TTTT} (1/2 marks each. Total: 8 marks) (iii) P (of obtaining at least two heads) = 11/16 = 0.6875. (3 marks) (iv) P (of obtaining at more heads than tails) = 5/16 = 0.3125. (3 marks) Page 12 of 153 Part III Answer THREE of the following FIVE questions. Each question carries 34 marks. 10. The data below was obtained from the Chartered Insurance Institute of Nigeria in respect of marks scored by candidates in one of the Institute’s examinations for 2018 April Diet: Marks Frequencies 1 –10 6 11 – 20 9 21 – 30 3 31 – 40 8 41 – 50 30 51 – 60 9 61 – 70 16 71 – 80 4 81 – 90 10 91 – 100 5 Find the: a) mean b) mean deviation c) standard deviation and d) co-efficient of variation. (34 marks) SOLUTION Class F Class mid Fx /X – X/ f/X – X/ fX2 Limits points (X) 1 – 10 6 5.5 33 5.5 – 50.8 271.8 181.5 = 45.3 11 – 20 9 15.5 139.5 15.5 – 50.8 317.7 2,162.25 = 35.3 21 – 30 3 25.5 76.5 25.5 – 50.8 75.9 1,950.75 = 25.3 31 – 40 8 35.5 284 35.5 – 50.8 122.4 10,082 = 15.3 41 – 50 30 45.5 1,365 45.5 – 50.8 159 6,210.75 = 5.3 51 – 60 9 55.5 499.5 55.5 – 50.8 42.3 27,722.25 = 4.7 Page 13 of 153  61 – 70 16 65.5 1,048 65.5 – 50.8 235.2 68,644 = 14.7 71 – 80 4 75.5 302 75.5 – 50.8 98.8 22,801 = 24.7 81 – 90 10 85.5 855 85.5 – 50.8 347 73,102.5 = 34.7 91 – 100 5 95.5 477.5 95.5 – 50.8 223.5 45,601.25 = 44.7 100 5,080 1,893.6 258,458.25 (1/4 marks for each correct figure in the table above. Total: 15 marks) a) Mean = EfX/Ef = 5,080/100 = 50.8 (4 marks) b) Mean Deviation = 1,893.6/100 = 18.936 (5 marks) c) Standard Deviation = 258,458.25 – (5,080)2 100 100 = 2,584.58 – (50.8)2 = 2,584.58 – 2,580.64 = 3.94 = 1.985 (5 marks) d) Coefficient of variation = Standard Deviation/Mean X 100% = 1.985/50.8 X 100% = 3.91% approximately (5 marks) (Grand Total: 34 marks) 11. a) Write short note on FSA (5 marks) b) Describe the four (4) FSA’s statutory objectives (16 marks) c) Mention five roles of the FSA (10 marks) d) Outline three implications of risk-based regulation. (3 marks) Solution a) The FSA is an independent, non-governmental body, which is given powers by the FSMA. It officially assumed its full role of single regulator for the UK financial services industry in 2001. It is now the single statutory regulator responsible for regulating banking, deposit-taking, insurance, mortgage lending, friendly societies and investment business as well as intermediaries selling financial products. The FSA is funded by a levy on regulated firms. (2 ½ marks for any correctly stated point. Maximum of 2 points to be graded. Total: 5 marks) Page 14 of 153 b) The four (4) statutory objectives of FSA are: (i) Maintaining confidence in the UK financial system – It achieves this by supervising exchanges, settlement houses and other market infrastructure providers, and conducting market surveillance and transaction monitoring. (ii) Promoting public understanding of the financial system – It works to help consumers obtain the knowledge, aptitude and skills necessary to become informed consumers, so that they can manage their financial affairs more effectively. (iii) Securing the appropriate degree of protection for consumers – Authorizing only those firms and individuals that satisfy the necessary criteria to engage in a regulated activity. And once authorized, the FSA requires firms and individuals to comply with the rules and requirements, as laid down in the FSA Handbook. (iv) Reducing financial crime – Work focuses on three main types of financial crime; money laundry, fraud and dishonesty and market misconduct, such as insider dealing. (2 marks for stating the main objective. 1 mark each for each correct explanation/description under each main point. Maximum of 2 points should be graded under each point. Sub-Total: 4 points. Total: 16 marks) c) The roles are: i) Set the rules, via its Handbook, Sourcebooks and other guidance (ii) Authorizes firms and individuals to operate within the regulated markets (iii) Monitors the external environment for threats to its strategic objectives (iv) Monitors the markets and regulated firms operating within those markets (v) Responds to changes, threats or other developments by amending its rules (vi Acts to prevent or resolve failures, problems or breaches of its rules (2½ marks each for any correctly stated role. Maximum of 4 to be graded. Total: 10 marks) d) Three implications of risk based regulation are that: (i) It influences the nature of the regulation itself (ii) It affects the way in which the regulator conducts itself and how it looks at firms (iii) It is embedded throughout the regulations themselves. (1 mark each for any correctly stated implication. Maximum of 3 to be graded. Total: 3 marks) (Grand Total: 34 marks) 12. Explain any reasons why insurance companies prefer to have a financial rating by the rating agencies. (15 marks) b) Outline the procedures or stages involved in the rating process between the insurance company and rating agency. (16 marks) Page 15 of 153 c) Mention any three (3) options available to insurance companies in case of shortfall regarding their regulatory capital? (3 marks) Solution a) Insurance companies prefer to have a financial rating by rating agencies because: it demonstrates to policyholders that a third party has measured the likelihood of the insurance company being able to meet their financial obligations/commitments it allows for financial strength comparisons among different insurance companies Brokers and clients can decide on their risk appetite by choosing the financial rating that they prefer for their insurance carriers. it allows for premium differentiation among the insurance companies, where by an extremely strong companies charge higher premium than a low rated company it is another means of determining whether an insurance company is solvent or insolvent (3 marks for each correctly stated point. Maximum of 5 points to be graded. Total: 15 marks) b) The procedures or stages involved in the rating process between the insurance company and rating agency are: the insurance company meets the agency and signs a contract at least two analysts spend a day with the senior executives to understand the insurance company’s business an exhaustive analysis is undertaken over the next five weeks and may require answers to further questions the lead analyst will then recommend a rating to a committee of eight analysts who then debate the methods and reasoning the committee will vote on the rating the insurance company is then told of the rating and can either accept it or appeal and the committee re-sits once agreed the rating agency issues a press release the rating agency will then monitor the insurance company and carry out an annual review. (2 marks for each correctly stated procedure. Total: 16 marks) c) The options available to insurance companies in case of shortfall regarding their regulatory capital are: issuing new shares in a limited liability company borrowing * switching out of assets reducing the volume of business written, particularly in lines which generate a high capital requirement * purchasing reinsurance (1 mark for any correctly stated option. Maximum of 3 options to be graded. Total: 3 marks) (Grand Total: 34 marks) Page 16 of 153 13. a) Define a Proposal Form? (6 marks) b) Enumerate any five (5) ways through which a proposal may be made by the proposer to the insurance companies. (20 marks) c) Differentiate between “perceived and actual risks”. (8 marks) Solution a) A proposal form may be defined as a pre-designed form which is used to elicit all vital information relating to the risks proposed for insurance. This vital information is referred to as the material facts. Though, in practice the contents and wordings of the proposal form vary from an insurance company to the other, but the main objective is the same, and which is to elicit all the information supplied by the proposer with a view to determining whether or not to accept the risk proposed for insurance and if it would be accepted, at what premium rate, terms and conditions. (2 marks for any correctly stated point. Maximum of 3 points to be graded. Total: 6 marks) b) The five ways through which a proposal may be made by the insured to the insurance companies – through completion of the hard copy of the proposal form – through telephone calls – via a broker – via a broker slip (Lloyd’s market) – via the internet (2 marks for stating the way; 1 mark for making valid point/description of the way stated. Maximum of 2 points to be graded under each stated way. Sub-Total per way = 4 marks. Total: 20 marks) c) Perceived risks are risks as being perceived by individual persons. They are generally influenced by the following characteristics: – Familiarity – Level of Control – Personal or societal consequences – Frequency and severity of the risky event (1 mark for every correctly stated point. Maximum of 4 points to be graded. Total: 4 marks) while Actual risks are those risks we can directly observe, especially through physical counting of the current or past events relating to them. Examples are the number of motor accidents, theft cases, fire incidents and number of death claims say over the last 3 underwriting years. Since these events have actually taken place and are observable, we may thus refer to them as “real or observable risk”. (1 mark for every correctly stated point. Maximum of 4 points to be graded. Total: 4 marks) (Grand Total: 34 marks) Page 17 of 153 14) (a) Define regression? (5 marks) (b) Enumerate any three (3) uses of regression. (6 marks) (c) X Y 100 80 140 87 150 90 110 85 122 86 82 57 148 88 170 110 145 89 115 83 (i) Draw a scattered diagram for the above data. (5 marks) (ii) Determine the regression line of y on x. (18 marks) Solution (a) Regression may be defined as the relationship which exists between two or more variables. This relationship may have to do with a change or changes which may occur to one of the variables as a result of a change or changes in the other variable. (2½ marks for the each correctly stated point. Maximum of 2 points to be graded. Total: 5 marks) (b) Three uses of regression are – i) It is used to determine the relationship which may exist between two or more variables. ii) It is used to improve our knowledge on the variable of interest. iii) It is used for estimation and prediction. (2 marks for the each correctly stated use. Maximum of 3 points to be graded. Total: 6 marks) (c) Y 120 100 80 60 40 20 0 0 20 40 60 80 100 120 140 160 180 (5 marks) Page 18 of 153 (d) Let the regression line of y on x be represented by the2 y = a+bx (1 mark) ∑ 𝑦 𝑏∑ 𝑥 where a = − (1½ marks) 𝑛 𝑛 and b = n∑ 𝑋𝑌 − ∑ 𝑋 ∑ 𝑌 (1½ marks) N∑ 𝑋² − (∑ 𝑋)² X Y XY X2 100 80 8,000 10,000 140 87 12,180 19,600 150 90 13,500 22,500 110 85 9,350 12,100 122 86 10,492 14,884 82 57 4,674 6,724 148 88 13,024 21,904 170 110 18,700 28,900 145 89 12,905 21,025 115 83 9,545 13,225 1,282 855 112,370 170,862 (½ mark for each bolded entry above. Total: 11 marks) b = 10 (112,370) – (1,282)(855) (1 mark) 10 (170,862) – (1,282)2 = 1,123,700 – 1,096,110 = 27,590 = 0.4238 (1 mark) 1,708,620 – 1,643,524 65,096 a = 855 - 0.4238 (1,282) = 85.5 -54.33 = 31.17 (1 mark) 10 10 Therefore, the regression line, y = 3.17 + 0.4238x (1 mark) (Grand Total: 34 marks) Page 19 of 153  LOGO CHARTERED INSURANCE INSTITUTE OF NIGERIA ASSOCIATESHIP APRIL 2022 DIET EXAMINATION PAPER SUBJECT A02 REINSURANCE: PRINCIPLE AND APPLICATION All answers are to be written on the answer booklet(s) supplied in accordance with the following instructions: Three hours are allowed for this paper. Fill in the information requested on the answer booklet and on form B. Handle the answer booklet with care. Do not write on the question paper. The answer booklet should be handed over personally by you to the invigilator before you leave the Examination Hall. Insert your candidate’s number as given on your admission permit and any other particulars required on the cover and flap of the answer booklet. Ensure that you write the full and correct candidate’s number. No name should be written on any leaf of the book, or on any supplementary leaves that may be issued to the candidates. The answer to each question must be commenced on a separate page. Where however, a question consists of two of more parts, this instruction do not apply to the separate parts. Write in the ruled margin the number and question attempted. Leave no blank pages among your answers. Where supplementary leaves are used, the candidate’s number should be written in the space provided on them and fastened at the end of the book inside the cover. FAILURE TO ADHERE TO INSTRUCTIONS (WRITTEN AND VERBAL) WILL ATTRACT STATED SANCTIONS AS STATED IN THE APRIL 2022 DIET CANDIDATES’ INSTRUCTIONS. Page 20 of 153  CHARTERED INSURANCE INSTITUTE OF NIGERIA A02 – REINSURANCE: PRINCPLES AND APPLICATION INSTRUCTIONS TO CANDIDATES Three hours are allowed for this paper. You should answer all questions in Part I, the compulsory question in Part II and three out of the five questions in Part III. The paper carries a total of 200 marks distributed as follows: Part I 8 Compulsory Questions 48 marks Part II 1 Compulsory Question 50 marks Part III 3 Optional Questions 102 marks. You are advised to spend not more than 45 minutes on Part I and strongly advised to attempt ALL the required questions to score maximum possible marks. Where a question is split into parts (a), (b), etc., marks for each part are only shown if they are split unevenly between the parts and you should spend your time in accordance with the allocation. In attempting the questions, you may find it helpful in some places to make rough notes in the answer booklet. If you do this, you must 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. Answer each question on a new page. If a question has more than one part leave several lines blank after each part. Page 21 of 153 Chief Examiner’s Comments Question 1 The question was intended to test candidates’ knowledge of reinsurer’s principal sources of statistical data. The attempt was good (95%) being a short question and the performance was above average (70-75%). Some candidates misunderstood the difference between direct insurer’s sources of statistical data with that of reinsurers for operational needs. Question 2 Majority of candidates (87%) attempted this question but their performance was very poor (20-35%) as the candidates did not understand the question properly and that affected the quality of their answers. Question 3 The question tested candidates’ knowledge about reinsurance principles. Most of the candidates (85%) attempted the question but the performance was below average (40%). Candidates should familiarise themselves and read more on methods of transacting reinsurance international business. Question 4 Good attempt by candidates (82%) but they misunderstood and misinterpreted the question with the standard exclusions as against relating it to motor insurance treaties/exclusions. Overall, candidates performed above average as 50-55% of those who attempted the question scored above average. Question 5 The question tested candidates’ knowledge about buyers of reinsurance coverage or products. Most of the candidates scored above average as 80% of them handled the question very well from practical knowledge point of view. However, a small number 20% of the candidates confused buyers of direct insurers with that of reinsurance coverage. Question 6 (a) The question was well attempted (81%) but the performance was just above average (60%). Candidates were not very clear about the practical application of overriding commissions in reinsurance vis-à-vis, direct insurers in co-insurance business. (b) Candidates performance was below average (47%) because the actual definition of OGR was not adequately stated. Page 22 of 153 Question 7 The question tested candidates’ ability in areas of board of directors/company’s investment policy. Over 90% of the candidates attempted the question whilst an average performance was recorded (50-55%). Candidates should concentrate and read more of insurance journals, company’s annual accounts and course books. Question 8 Most candidates (95%) attempted this question which required them to show their knowledge about non- proportional as against proportional insurance treaties. However, the performance was poor (20-30%). Candidates misunderstood the question. They stated advantages and disadvantages of proportional and non- proportional treaties instead of the common characteristics of the two. Question 9 (a) The question tested candidates’ knowledge of the Insurance Act 2003 section 2 regarding the main classes of insurance. Performance was above average (75%) but some candidates did not refer to the classification in accordance with the Insurance Act 2003 but their practical knowledge only. (b) However, in the part (b) candidates’ performance was woeful being a compulsory question with calculation of Reinsurance Commission Adjustment statement: only 14% scored above the average mark (20) of the 40 marks in the section (b). Question 10 Only few candidates attempted this question; regarding surplus reinsurance but the performance was below average (25%-45%). It was obvious that candidates did not prepare very well for questions in that area. Question 11 The (a) part was to test candidates’ ability in pooling arrangements and co- insurance. Majority of the candidates attempted and candidates’ performance was very good (75%) as the recorded figures revealed. The (b) part tested candidates’ knowledge of the importance of reinsurance arrangement protected insurance companies’ portfolio. Over 60% attempted the question and the performance could be better if candidates are well read. Question 12 The question was attempted by a few candidates (20%) whilst the performance was below average (35%). The question was a bit technical particularly for those who did not have practical reinsurance knowledge regarding contract data in reinsurance arrangement. Page 23 of 153 Question 13 (a) The section tested candidates’ knowledge on general reinsurance claims procedures. Over 70% of the candidates attempted but only a few (30%) were able to get the right points. Candidates should study more and attend coaching classes prior to the examination. (b) The question tested candidates’ knowledge on claims administration performance, was very poor (30%) which showed that candidates need to be more prepared for the examination on reinsurance. Question 14 Candidates performed above average as regards the difference between captives and self- insurance. Through the calculation in part (b) of the question, candidates show that they understood the application of the treaty reinsurance arrangement relating to reinsurance protection for miscellaneous accounts. Very good attempt 55-60% scored above average. Comments on Overall Performance: The overall performance showed that candidates did not adequately prepare for the examination whilst most candidates (81%) lacked practical knowledge of reinsurance principles and applications. Moreover, there is unnecessary phobia about reinsurance being a “complex” aspect of insurance practices. Suggestion(s) on Improvement (if any): Special program should be set up for coaching candidates who intend to major in reinsurance practice ahead of the next diet and/or future examination. Moreover, examiners report, should be made available for subsequent candidates and should be encouraged to seek practical knowledge in some reinsurance department of some companies. Page 24 of 153 REINSURANCE: PRINCIPLES AND APPLICATION A02 Answer ALL questions in Part I. Each question carries six (6) marks. 1. Enumerate four (4) various sources that a reinsurer principally obtains statistical data from. Solution: A reinsurer obtains statistical data principally from the following: Reinsurance underwriters Claims department Retrocession department Technical processing department Finance department Security department (1½ marks for each correctly stated answer. Maximum of 4 points to be graded. 6 marks in total). 2. Explain the reasons why companies with similar portfolios set different retention limits. Solution: Companies with similar portfolios will often set different retention limits because their corporate objectives, risk appetite, the weight they place on the factors which determine the retention are unlikely to be identical. (2 marks for each of the bolded points. 6 marks in total). 3. As an international business, reinsurance is exposed to currency fluctuations. How can this exposure be avoided on reinsurance transactions in currency other than the normal accounting currency of the reinsurance company? Solution: An exact match of assets and liabilities can avoid this in the transaction currency. If a reinsurance company transacts business in many currencies, such a policy might be impractical. In order to reduce costs, ease administrative burdens and reduce currency exchange risk, reinsurers tend to hold relatively few but strong currencies and then link other weaker currencies and their appropriate assets and liabilities to one of those stronger currencies. (3 marks for each of the bolded points) Page 25 of 153 4. List any four (4) exclusions that are generally found in motor insurance treaties. Solution The exclusions which are generally found in motor insurance treaties are: i) Those who take out dangerous activities ii) Those which take out hazardous cargo iii) Areas not properly covered by motor insurance iv) Exposure to high-value third party property damage v) Exclusions relating to areas of higher risks vi) Consideration for higher premium (1 ½ marks for each correctly stated exclusion. Maximum of 4 to be graded. Total: 6 marks) 5. Enumerate any six (6) buyers of reinsurance coverages or products. Solution The buyers of reinsurance coverages or products are: Direct insurance companies Lloyd’s syndicates Captive insurance companies State insurance companies Reinsurance pools Reinsurance companies (1 mark for any correctly stated one. Maximum of 6 to be graded. Total: 6 marks) 6. Explain the following terms: (a) Overriding commission; (b) OGR? Solution: Overriding commission is money paid by the reinsurer to the reinsured in order to cover the reinsured’s costs in administering the business and ceding it to the reinsurer. The amount given to the reinsured is dependent upon the profitability of the treaty and the management expenses of the reinsured. (3 marks). Original Gross rate (OGR) is the rate of premium applied under the original business to the sum insured. The result of the original gross rate times the sum insured equals the original premium. No deductions are made for commission or brokerage. (3 Marks). 7. When a board of directors identifies the company’s investment policy, there are always identified needs of the companies that requires serious consideration and balancing in order to make a sound decision. Enumerate any three (3) of these needs. Page 26 of 153 Solution: A board of directors will seek to balance the following needs when the directors identify the company’s investment policy: Preserve and enhance the capital of the company Generate adequate level of returns compatible with risk Have adequate cash available in relation to cash-flow requirements Match assets to liabilities as and when they are expected to fall due for payment Consider any differential tax implications of alternative policies Segregate life funds from general funds Spread the holdings of investment so that there is not excessive reliance on any one institution or sector in the event of collapse or failure of that institution or sector (2 marks each for correctly stated need; Maximum of 3 to be graded. 6 marks in total). 8. Concisely enumerate any four (4) common characteristics that differentiate non- proportional from proportional treaties. Solution The common characteristics that differentiate non-proportional from proportional treaties are: the size of cession is not determined case by case accounting operations are reduced to a minimum, but are also more elaborate administration costs are substantially reduced. the reinsurance premium is all-inclusive and not calculated on each cession, but o the whole of the cedant’s portfolio in one or more branches, in order to cover losses occurring during a calendar year the reinsurance premium is predetermined, which enables the cedant to allow for the cost in its budget there is usually no profit commission the reinsurer does not deposit technical reserves, so that the cedant has to finance it. (1½ mark for each correctly stated characteristic. Maximum of 4 characteristics should be graded. Total: 6marks) Part II Compulsory Question (a) All candidates are required to attempt the option (a) (b) Candidates are required to attempt either of the option (b) and NOT both. This question carries 50 marks. 9. (a) According to the Federal Republic of Nigeria Insurance Act 2003, Section 2 stated the main classes of insurance as two. Mention these two main classes and state the any three categories under each class. (10 marks) Page 27 of 153 (b) Best Insurance Company Limited has a surplus treaty protecting her fire insurance portfolio. The insurance company is allowed a provisional commission of 25% on premium ceded and the actual commission is driven by the loss ratio and subject to a pre-agreed scale. The following are extracts from the books of Best Insurance Company Limited between 01/01/2020 – 31/12/2020: 2020 Premium Ceded Premium Ceded Claims Paid by (Basic) (N) (N/Perils) (N) the Treaty (N) Q1 116,438,409.00 24,855,177.00 23,132,277.00 Q2 132,113,481.00 29,232,614.00 89,744,481.00 Q3 168,879,405.00 36,025,301.00 378,542,014.00 Q4 102,608,118.00 23,079,458.00 152,375,575.00 Information: Outstanding loss to treaty as at 31/12/2020 is N303,936,744.00 Premium Ceded in 2019: N342,393,210.00 Losses outstanding as at 31/12/2019: N505,671,033.33 Premium portfolio @ 40% Loss Portfolio @ 90% Required: i. Prepare the commission adjustment statement and determine the actual commission using the underlisted sliding scale table: (34 marks) Commission Loss Ratio 22.5% for 60% or greater 23.0% for 57.14% or greater but less than 60% 23.5% for 54.29% or greater but less than 57.14% 24% for 51.43% or greater but less than 54.29% 24.5% for 48.57% or greater but less than 51.43% 30% for less than 20% ii. What is the additional commission payable (if any) by the reinsurers? (3 marks) iii. What is the return commission (if any) due to the reinsurers? (3 marks) Page 28 of 153 Solution a) The two classes of insurance, according to the Act are: Life Insurance Business and General Insurance Business. (2 marks for each correctly stated class) The categories are: Life Insurance Business: o Individual Life Insurance Business o Group Life Insurance and Pension Business o Health Insurance Business General Insurance Business: o Fire Insurance Business o General Accident Insurance Business o Motor Vehicle Insurance Business o Marine and Aviation Insurance Business o Oil & Gas Insurance Business o Engineering Insurance business o Bonds Credit Guarantee and Suretyship Insurance Business o Miscellaneous Insurance Business (1 mark each for correct categories. Maximum of 3 to be graded per class. Sub-Total: 6 marks) (Grand Total: 10 marks) b) COMMISION ADJUSTMENT STATEMENT AS AT 31/12/20 (1 Mark) CLASS: FIRE SURPLUS (1 Mark) COMPANY: BEST INSURANCE COMPANY LIMITED (1 Mark) Gross Premium Ceded 633,231,963 (2 marks) Less Premium Reserve in 2020 @40% of (2 Marks) N633,231,863 253,292,785.24 Add Premium Reserve in 2020 @ 40% of (2 Marks) N342,393,210 136,957,284.00 EARNED PREMIUM 516,896,461.85 (4Marks) INCURRED LOSS Losses Paid As @ 31/12/2020 643,794,346.72 (2 Marks) Add Loss PTF Withdrawal @ 31/12/20 = (4 Marks) 90% of N303,936,744 273,543,069.60 Page 29 of 153  Less Loss PTF Withdrawal @ 31/12/2019 = (4 Marks) 90% of N505,671,033.33 455,103,930.00 INCURRED LOSS 462,233,486.32 (4Marks) LOSS RATIO = INCURED LOSS/EARNED 89.42% (3 Marks) PREMIUM X 100 PROVISIONAL COMMISSION = 25% X (3 Marks) N633,231,963.00 158,307,990.75 ACTUAL COMMISSION RATE BASED ON THE SLIDING SCALE TABLE IS 22.5% (3 Marks) FOR LOSS RATIO HIGHER THAN 60% = 22.5% * N633,231,963.00 142,477,191.68 ii. Since the provisional commission of N158,307,990.75 is higher than the actual commission of N142,477,191.68, there is a refund commission due to the reinsurers from the reinsured of N15,830,799.08 being the difference between the provisional commission and the actual commission i.e N158,307,990.75 – N142,477,191.68 = N15,830,799.08 (2 Marks) Sub-Total: 40 marks) (Grand Total: 50 marks) OR (b) The information below related to the reinsurance businesses of ABC Insurance Company Limited to Abuja Reinsurance Limited for 2019 and 2020 2019 Premium ceded to the reinsurance treaty N First Quarter - 29,500,000.00 Second Quarter - 20,800,000.00 Third Quarter - 6,600,000.00 Fourth Quarter - 3,100,000.00 2020 Premium ceded to the reinsurance treaty Page 30 of 153  N First Quarter - 31,900,000.00 Second Quarter - 22,800,000.00 Third Quarter - 10,400,000.00 Fourth Quarter - 4,900,000.00 You are required to prepare the profit commission statement for 2020 taking into consideration the following terms of the reinsurance treaty: i. The ceding commission is 25% ii. Management expenses is 15% iii. Unearned premium reserve is 30% iv. Reserve for claims pending settlement is 10% v. Losses are to be carried forward till extinction vi. Profit share is at 35%. Please note that there was loss of N3,000,000.00 in 2019. (40 marks) Solution a) The two classes of insurance, according to the Act are: Life Insurance Business and General Insurance Business. (2 marks for each correctly stated class) The categories are: Life Insurance Business: o Individual Life Insurance Business o Group Life Insurance and Pension Business o Health Insurance Business General Insurance Business: o Fire Insurance Business o General Accident Insurance Business o Motor Vehicle Insurance Business o Marine and Aviation Insurance Business o Oil & Gas Insurance Business o Engineering Insurance business o Bonds Credit Guarantee and Suretyship Insurance Business o Miscellaneous Insurance Business (1 mark each for correct categories. Maximum of 3 to be graded per class. Sub-Total: 6 marks) (Grand Total: 10 marks) b) PROFIT COMMISSION STATEMENT: (2 marks) ABC INSURANCE COMPANY LIMITED Page 31 of 153  OutGo Income (NGN) (NGN) Gross Premium Ceded 4 marks 70,000,000.00 PTF Premium Ass. 4 marks 18,000,000.00 LOSS PTF Ass. 2 marks - Ceding Commission @ 0.025% 4 marks 17,500,000.00 PTF Premium Withdrawal 4 marks 21,000,000.00 Loss PTF Withdrawal 2 marks - 15% Management Expenses 2 marks 10,500,000.00 Balance c/d 2 marks - Total: 49,000,000.00 88,000,000.00 2 marks Balance for Year 2016 = 39.000,000.00 2 marks ttTotal Income = NGN88,000,000.00 2 marks Total OutGo = NGN49,000,000.00 2 marks Balance for Year 2016 = NGN88,000,000.00 - NGN49,000,000.00 = NGN39,000,000.00 Less Loss from Year 2015 of N3,000,000.00 1 mark = 39,000,000.00 - 3,000,000.00 = N36,000,000.00 1 mark Balance Profit as at 31/12/2019 = N36,000,000.00 2 marks Profit Commission = 35% of N36,000,000.00 = N12,600,000.00 2 marks Page 32 of 153 Part III Answer THREE of the following FIVE questions. Each question carries 34 marks. 10. a) Explain the term “surplus reinsurance? (10 marks) b) Enumerate any four (4) advantages of a surplus reinsurance. (12 marks) c) Enumerate any four (4) disadvantages of a surplus reinsurance. (12 marks) Solution a) Surplus reinsurance is any reinsurance that is arranged on a surplus treaty. A surplus treaty is where the cedant cedes to the reinsurer risks in excess of its net retention. Furthermore, the net retention under a surplus treaty is called a line and the surplus treaty will thereafter be arranged as a multiple of the cedant’s net retention. Any risk which falls below the cedant’s net retention is retained 100% by the cedant, unlike in a QS, where every risk is shared between the cedant and reinsurer. (2½ marks for any correctly stated point. Maximum of 4 points to be graded. Total: 10 marks) b) The advantages of a surplus reinsurance are that: it enables the cedant to express its retention in absolute monetary terms it enhances the cedant’s underwriting capacity it gives a form of protection against high frequency of loss it also enables the cedant to keep a higher proportion of premium there could be 2nd and 3rd surplus treaties, so that once the 1st surplus treaty capacity is fully utilized, the cedant moves on to the 2nd surplus treaty and so on. (3 marks for any correctly outlined advantage. Maximum of 4 to be graded. Total: 12 marks) c) The disadvantages of a surplus reinsurance are that: there is limited protection against accumulation of losses it is more complex in administration when compared with a quota share there is a high possibility of overstating the retention ceding commission is equally lower when compared with that obtainable in quota share (3 marks for any correctly outlined disadvantage. Maximum of 4 to be graded. Total: 12 marks) 11. Are pooling arrangement and co-insurance the same? Justify your response. (10 marks) ii) Enumerate and explain any six (6) reasons why direct offices need reinsurance for their portfolios. (24 marks) Solution Page 33 of 153 a) No. pooling arrangement and co-insurance are not same. (2 marks). A pooling arrangement is an arrangement whereby a number of companies (insurance and reinsurance) operating in a particular country or region or sub-region and the business accepted is shared amongst the participants of the pool. Therefore, the participants are commonly exposed to an accumulation of risk from the business attaching to the pool. While co-insurance is the sharing or spreading of a risk between two or more insurance companies (2 marks for each correctly stated point. Maximum of 2 points to be stated under each term. Sub-Total: 4 marks on each term. Sub-Total: 10 marks) b) The following are reasons why direct offices need the reinsurance for their portfolios: Further spread of risks for the direct offices. To comply with the regulator’s requirements. Bigger or additional capacity to the direct offices. Catastrophe protection. Stabilization of claims ratio. Profit sharing arrangement. It brings about confidence to the direct offices. Product development. Underwriting and other financial advisory services. Solvency margin protection. Training and development programmes. (2 marks each for every correctly stated reason. 2 marks for every correct explanation under each stated reason. Sub-Total: 4 marks per reason. Grand Total: 24 marks) 12. (a) To calculate the result of a contract, proper diligence must be observed in the recording of relevant data. List and explain three (3) sources of statistical data for reinsurance assessment. (14 marks) (b) List and explain five (5) core contract data to be recorded for both proportional and non-proportional reinsurance contract. (20 marks) Solution: Sources of statistical data include: Reinsurance Underwriters: the reinsurance underwriters are the initial source of information in relation to a reinsured. Statistical information in relation to premiums and claims will be provided by the reinsured or through an intermediary. Claims Department: claims associated with proportional treaties accounting statement. They also collate claims data for individual risks and contracts as well as non- proportional treaties on a per risk basis. Also, information relating to catastrophe claims (if any) would be collated. All the information collated by the claims department will Page 34 of 153 be shard with their underwriting colleagues as a basis for reviewing terms for contract or reinsurance for the future. Retrocession Department: the department will be responsible for maintaining details of each retrocession contract, allocating gross losses to the reinsurer’s retrocessions and effecting recoveries through the production and submission of retrocession accounts. (5 marks each for underwriter and claims. 4 marks for retrocession department. 14 marks in total) (2 marks each for listing the sources and 3 marks each for correctly explaining each of the sources. But 2 marks each for listing Retrocession department and explanation. Maximum 14 marks in total). b) Core Contract Data consist of the following: Reinsurers underwriting reference: this will be a unique reference identifying the contract concerned and may be arranged to identify other matters such as underwriting department, class of business, the contract type and the retrocession protections involved. Name of reinsured Name of insured (for specific treaty protection). Name of the Intermediary (ies). If applicable e.g. reinsurance brokers. Inception and expiry date of the reinsurance contract: The basis of the period e.g. risk attaching or claims made or losses occurring for non proportional or year of account or underwriting year for proportional treaty. Class (es) of business protected: General classes are often subdivided into more specific classes e.g. marine account could be subdivided to Marine cargo and Marine hull etc. Types of business: This relates to whether the contract is direct, facultative or treaty reinsurance or retrocession. Also the type of treaty e.g. quota share or surplus, working or catastrophe excess of loss. Reinsured’s applicable protected premium income: The amount and the basis of premium income, which may be earned, written or accounted should be recorded. In addition whether the premium is on estimated amount or the current or future year(s) or actual amount. Contract limits and deductibles: these are the reinsurance indemnity or policy limits and retained amounts, including inner aggregate deductible. Currency of limits and deductibles: The contract will identify the currency (ies) in which the treaty limits and amounts are expressed and the settlement currency (ies). When assessing the statistical trends of a portfolio arising from multi- currency treaties, all currencies should be converted at a constant rate of exchange, whether this is the rate at the inception of the policy, treaty year, date when the information was produced or other appropriate basis. Territory protected: The reinsurance contract may provide cover on a worldwide, countries specific, particular location or area basis. Reinsurers written line in terms of amount and percentage Page 35 of 153  Reinsurer’s signed line in terms of amount and percentage. Retrocession protection: The Reinsurer should record sufficient information to identify all retrocession protections to which the assumed risks will be ceded, on what basis and the sequence of recovery where several retrocession protections operate. Contract results: This is an amount which reflects the underwriting position reported to the reinsurer either deficit (claims exceed premium items) or credit (premium exceed claims item. It can be contract result for one year only and/or all underwriting years in which the reinsurer undertakes. Loss ratio: This is a percentage indicating the current underwriting deficit or credit position. Incurred claims are expressed as a percentage of the premium received by the reinsurer. (4 mark each for 5 correct and well-explained core contract data. Maximum 20 marks in all). 13. (a) The way in which claims are processed depends very much on the class of business involved and whether the claims are for major or for minor losses. Explain, with at least five concentration points, the general claims procedure. (10 marks) (b) Claims are the ‘shop window’ of any reinsurance operation therefore the handling and payment of claims has become increasingly important. Explain four (4) reasons for having a claims department. (24 marks) Solution: The the general claims procedure are usually around the following concentration points: Examination of the question of coverage Has a policy been issued for the insured? If so, what were the conditions on the original policy and what was the sum insured? Amendments/endorsement: Have there been any amendments? If so, when? Period of insurance: When does the original policy commence and when does it end? Perils Covered: Is the risk mentioned in the claim covered under the original policy? Is there any exclusion that might apply? If so, are they relevant to the whole claim or only for part of it. Is the reinsurance cover to be refused as a result of the reinsured failing in any of its duties? Reasons could be non-payment of the premium or failure to observe the stipulations under the policy Does the claim fall within the period of reinsurance? (2 marks each for any 5 of the above. 10 marks in all). Page 36 of 153 b) There are a number of reasons for having a claims department. These include: Claims frequency is increasing and mounting all the time. Example is the increasing number of motor claims as a result of the increasing number of cars on the road and the rising number of accidents resulting from this. Technological developments have led to more complex and time-consuming claims and hence the level of expertise required has also increased. Claims processing is also made more complicated by legal and legislative developments. The increasing amount of international trade and considerations that have to be given to the laws of the individual countries from which the underlying contracts emanate. There are a number of requirements on the internal organisations of the company that have to be fulfilled. Information must be passed on both vertically and horizontally, to all those parts of the company concerned. This information includes: Adverse development in a risk, contract, or type of business or geographical area Informing underwriters and senior management of any key changes in the claims practices of any underlying reinsured. Keeping the company informed of any key changes in claims handling of competitor reinsurers. Informing the account department of any large request that may be required from reinsured in the settlement of claims i.e cash loss. (8 marks for each well explained points. 24 marks in total). 14. (a) Differentiate between captives and self-insurance. (12 marks) (b) Oluwalanbe Insurance Plc. has the following treaty reinsurance arrangement protecting its miscellaneous accident account in 2020 underwriting year. Gross Retention: N1,000,000.00 Proportional treaty: 20 lines Surplus treaty. Non-Proportional treaty: Risk excess of loss programme as follows Deductible: N300,000.00 1st layer cover: N200,000.00 2 layer cover: nd N500,000.00 The company underwrites a risk with N25,000,000.00 sum insured and N2,500,000.00 premium. Required: Apportion the risk based on the sum insured and the premium. (12 marks) If there was a loss of N24,000,000.00, apportion the liability. (6marks) What is the liability of the excess of loss programme if there is any? (4 marks) Page 37 of 153 Solution a). A captive: is an insurance company owned by its parent company (generally not an insurance company, but for example a large industrial or commercial organisation set up and managed in one of the low tax environment. The Captives accepts risks from its parent company for a premium, which it invests to meet any future losses. A large buyer of insurance may want to remove itself from the conventional spreading of loss, with its associated pricing spread, and have the insurance risk considered entirely on the basis of its own claims experience. Self-insurance is the most basic and the most frequently used form of ART.It is a process by which an insurance company self insures and retain some risks which would have otherwise cede or transfer to the reinsurer. The reinsurance buyer, when reviewing what has been bought, may feel that the reinsurance purchase has reduced company profit. This feeling may arise either because no claims have occurred or because the levels of claims have been predictable over a period, and that claims experience might be expected to continue into the future. The decision to self-insure will reduce cash flow. It should be noted that self-insurance should be accompanied by an emphasis on risk management and more control over those claims, which do occur. (6 marks for each fully explained teams. The bolded points should attract 2 full marks each. A total of 12 marks in all). b). i. Risk & Premium Apportionment Retention = N1,000,000 Treaty Capacity @ 20 lines = 20,000,000. Sum Insured @ N25,000,000 will be apportioned thus: Gross Retention share = 1,000,000/25,000,000 X100 = 4% (2 Marks) Surplus Capacity share = 20,000,000/25,000,000 X 100 = 80% (2 Marks) Balance which can be placed on facultative: = 4,000,000/25,000,000 X 100 = 16% (2 Marks) Premium Apportionment Retained premium: 4% X N2,500,000 = N100,000.00 (2 Marks) Surplus treaty premium: 80% X N2,500,000 = N2,000,000 (2 Marks) Balance/facultative: 16% X N2,500,000 = N400,000.00 (2 Marks) ii. Claim Apportionment: Total claim of N24,000,000.00 Retention share @ 4% = N24,000,000 X 4% = N960,000.00 (2 marks) Surplus share @ 80% = N24,000,000 X 80% = N19,200,000.00 (2 Marks) Balance/facultative share @ 16% = N24,000,000 X 16% = N3,840,000.00 (2 Marks). Page 38 of 153 Liability of the excess of loss programme Oluwanlabe Ins Plc share of the claim on the surplus treaty programme of N960,000.00 will be apportioned as follows: (1 Mark) Deductible = N300,000.00 (1 Mark) 1 Layer XOL = N200,000.00 st (1 Mark) 2 Layer XOL = N460,000.00 nd (1 Mark) Page 39 of 153  LOGO CHARTERED INSURANCE INSTITUTE OF NIGERIA ASSOCIATESHIP APRIL 2022 DIET EXAMINATION PAPER SUBJECT A03 FINANCE AND ACCOUNTING All answers are to be written on the answer booklet(s) supplied in accordance with the following instructions: Three hours are allowed for this paper. Fill in the information requested on the answer booklet and on form B. Handle the answer booklet with care. Do not write on the question paper. The answer booklet should be handed over personally by you to the invigilator before you leave the Examination Hall. Insert your candidate’s number as given on your admission permit and any other particulars required on the cover and flap of the answer booklet. Ensure that you write the full and correct candidate’s number. No name should be written on any leaf of the book, or on any supplementary leaves that may be issued to the candidates. The answer to each question must be commenced on a separate page. Where however, a question consists of two of more parts, this instruction do not apply to the separate parts. Write in the ruled margin the number and question attempted. Leave no blank pages among your answers. Where supplementary leaves are used, the candidate’s number should be written in the space provided on them and fastened at the end of the book inside the cover. FAILURE TO ADHERE TO INSTRUCTIONS (WRITTEN AND VERBAL) WILL ATTRACT STATED SANCTIONS AS STATED IN THE APRIL 2022 DIET CANDIDATES’ INSTRUCTIONS. Page 40 of 153  CHARTERED INSURANCE INSTITUTE OF NIGERIA A03 – FINANCE AND ACCOUNTING INSTRUCTIONS TO CANDIDATES Three hours are allowed for this paper. You should answer all questions in Part I, the compulsory question in Part II and three out of the five questions in Part III. The paper carries a total of 200 marks distributed as follows: Part I 8 Compulsory Questions 48 marks Part II 1 Compulsory Question 50 marks Part III 3 Optional Questions 102 marks. You are advised to spend not more than 45 minutes on Part I and strongly advised to attempt ALL the required questions to score maximum possible marks. Where a question is split into parts (a), (b), etc., marks for each part are only shown if they are split unevenly between the parts and you should spend your time in accordance with the allocation. In attempting the questions, you may find it helpful in some places to make rough notes in the answer booklet. If you do this, you must 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. Answer each question on a new page. If a question has more than one part leave several lines blank after each part. Page 41 of 153 Chief Examiner’s Comments Question 1 The question tested candidate’s knowledge about items that are commonly found under the prepayment and accrued income on the statement of financial position. All the candidates attempted the question, but the performance was very poor (about 35%). In- depth knowledge the coursebook is advised if the candidates desire a good success in this type of examination. Question 2 The question tested candidates’ knowledge about the accounting record prescribed by the Company Act to be kept by companies and their duties. Only about 20% of candidates that attempted the question obtained a pass mark. Candidates are therefore advised to properly prepare for improved future performance. Question 3 The question tested candidates’ knowledge on personal and impersonal accounts. Virtually all candidates attempted it and the general performance was encouraging (about 70%). However, some of the candidates could not be able to differentiate between the two (2) concepts and cite appropriate examples. Candidates need to read and understand the coursebook while preparing further examination. Question 4 The question required the candidates to list any three (3) out of numerous types of cost accounting methods. Majority of those that attempted the question performed very well i.e. about (55%); while the few ones that did not understand it, could not obtain a pass mark in the question. Question 5 The question tested candidates’ classifications of “accounts” with examples of each. Almost all the candidates attempted the question and the performance was encouraging (about 60%). However, some candidates could not cite a good example of both. Candidates are advised to study their coursebooks very well. Question 6 The question tested candidates’ knowledge on standard costing. Almost all the candidates attempted the question, but the performance was not encouraging about (25%). It is therefore recommended that candidates should study their coursebook properly to get correct facts. Question 7 The question tested candidates’ knowledge of the documents that are to be prepared when the final accounts and their notes are produced. The attempt was good (about 95%) but performance was poor (about 22%). A reason for this could be deduced to be students Page 42 of 153 trying to write answer from their knowledge rather than the coursebook. Candidates are enjoined to always read the coursebook and use it as a guide while preparing for examination. Question 8 The question tested candidates understanding of the basic concepts of accounting. The performance was fairly good, 51% of the candidate obtained the pass mark while 49% failed to write the answer correctly. Candidates were suggesting direct answers other than textbook answer. Candidates are advised to cover every aspect of their coursebook always. Question 9 This is the compulsory question that accounts for 25% of the total marks available. It was attempted by the candidates but only 18% of the candidates scored a pass mark. Knowledge about preparation of final accounts and regulatory guidelines were tested. The candidates need to be more conversant with every aspect of their course book as well as the environment and regulatory aspect of the syllabus. Question 10 The question tested candidates of the factors to be considered when selling required size for a business. The attempt was good and 70% of the candidates that attempted scored above average. The performance indicated that candidates displayed adequate understanding of the concept tested by the examiner. Candidates are advised to study harder and ensure the cover the syllabus always. This is the only way out to come out successfully in this type of examination. Question 11 The question tested candidates’ knowledge on various activity accounting ratios. The question was poorly answered. The performance was about 25%. Candidates are advised to familiarize themselves with the concept of accounting ratio as means of interpretation of financial statement. Question 12 The question tested candidates’ knowledge of general principles that guides insurers’ investment of their fund. The general performance was about average (50%). Some candidates were confusing the question with the general principles of insurance. This indicated that they did not understand what was required of them. Candidates are advised to read and understand the question very well before answering any question. Question 13 The question tested the candidates’ knowledge about the importance of supervision and circumstances in which the regulator can invoke laws to withdraw the authorisation. The Page 43 of 153 question was well attempted by all candidates as they all displayed a good understanding of the concepts. The general performance was about 70%. Question 14 The question tested candidates’ knowledge on sources of taxation, expenses not allowable while computing corporation tax as well as some aspects of VAT. However, the general performance was not encouraging, about 30% of them passed. it is surprising that many candidates could not define VAT nor list the sources of taxation. Candidates are advised to take their studying seriously and ensure that every aspect of the coursebook is covered. Comments on Overall Performance: The overall performance of 25% pass rate is below average. There is need for students’ sensitisation on how to adequately prepare for this type of examination. Suggestion(s) on Improvement (if any): Candidates are advised to study the coursebook and ensure that every aspect of the syllabus are covered. Page 44 of 153  FINANCE & ACCOUNTING A03 Part I Answer ALL questions in Part I. Each question carries six (6) marks. 1. There are various items commonly found under the prepayment and accrued income on the statement of financial position. List any two (2) of such items. Solution The items that are commonly found under the prepayment and accrued income on the statement of financial position are: accrued interest and rent deferred acquisition cost other prepayments and accrued income (3 marks for each correctly stated concept. Maximum of 2 to be graded. Total: 6 marks) 2. All companies are required by the “Company Act” to keep accounting record sufficient to show and explain the company’s transactions and to perform two duties. Concisely enumerate these two (2) duties. Solution The two (2) duties that the Company Act requires every company to keep on accounting record in order to show and explain the company’s transactions are: to disclose with reasonable accuracy, at any time, the financial position of the company at all times to enable the directors to ensure that any balance sheet and profit and loss account prepared for the purposes of the Act complies with its requirements. (3 marks for each correctly stated duty. Total: 6 marks) 3. Enumerate three (3) examples of personal accounts and three (3) examples of impersonal accounts. Solution Solution Account Type Examples Personal Accounts Debtors, creditors, assets, liabilities Impersonal Accounts Wages, sales, premium, commission, depreciation (1 mark for each correctly stated example. Maximum of 3 to be graded per account type. Total: 6 marks) Page 45 of 153 4. There are various types of cost accounting methods. List any three (3). Solution The various types of cost accounting methods are: * cost recording * product costing * absorption costing * activity based costing * variable or marginal costing * standard costing (2 marks for each correctly stated type. Maximum of 3 to be graded. Grand Total: 6 marks) 5. Enumerate the two classifications of “Accounts” and provide two (2) examples of each. Solution The two classifications of Accounts, with examples, are: Real Accounts: cash, land, buildings, cows, e.t.c. Nominal Accounts: debtors and creditors (assets and liabilities accounts); wages, sales, premiums, commission, depreciation. (1 mark for each corrected stated classification. I mark for each correctly stated example. Maximum of 2 examples should be graded. Sub-Total per classification: 3 marks. Grand Total: 6 marks) 6. Enumerate the three (3) broad categories that standard costing is usually classified into. Solution The three broad categories into which standard costings are classified are: basic cost standards ideals standards currently attainable standards (2 marks for each correctly stated category. Total: 6 marks) 7. When the final accounts and their notes are produced by a limited company, the documents prepared may be referred to as................. or.............. accounts. Solution When the final accounts and their notes are produced by a limited company, they may be referred to as published accounts or shareholders accounts. (3 marks for each bolded phrase above. Total: 6 marks) 8. There are usually four basic concepts of accounting. State any three (3) of these basic concepts. Solution The four basic concepts of accounting are: * “Going Concern” * “Accruals” * “Consistency” * “Prudence” (2 marks for each correctly stated concept. Maximum of 3 to be graded. Total: 6 marks) Page 46 of 153 Part II Compulsory Question. This question carries 50 marks. 9. (a) What is the full meaning of NIA? Enumerate any four (4) of roles of the body. (10 marks) (b) Annual returns of some documents and record are required to be submitted by companies limited by shares (other than those classified as small ones) to the corporate affairs commission not later than 42 days after their annual general meeting. Outline any four (4) of such required documents and records. (10 marks) (c) Next level Plc has authorized share capital of N20,000,000.00 divided into 600,000 ordinary shares of N25.00 each, 50,000 8% preference shares of N100.00 each. After ascertaining the net profit for the year ended 31st December 2020, the following balances remained in the ledger: Dr (N’000.00) Cr (N’000.00) 50,000 8% Preference Shares at N100.00 each 5,000 600,000 Ordinary Shares of N25.00 each 15,000 Retained Earnings 2,380 General Reserve 2,278 Trade Receivables 830 Trade Payable 652 Inventory 1,200 Freehold Property at Cost 11,890 Plant and Machinery at Cost 14,000 Provision for Depreciation on Plant and Machinery 6,000 Furniture and Fittings at Cost 1,000 Provision for Depreciation and Furniture and Fittings 400 Cash at Bank 2,790 After extracting the above balances, it was decided to pay a full year’s dividend on the preference shares and the directors decided to recommend a dividend of 7% on the ordinary shares and to transfer N800,000.00 to general reserve. Required: Prepare the statement of financial position of Next Level Plc as at 31st December 2020 in accordance with the requirements of International Financial Reporting Standards (IFRS). (Show your workings). (20 marks) d) A publicly quoted company in Nigeria is required to prepare general purpose financial statements. This is in line with IAS 1 which is on presentation of financial statements. List four (4) of those statements. (10 marks) Solution Page 47 of 153 (a) Nigeria Insurers Association. (2 marks) Some of the roles are: to protect, promote, and advance the common interest of insurers to advise members on any action by government or any authority in connection with any legislation or policy to advise or consult with the government regarding any act by it or its agencies with regard to any matter relating to insurance to guide and assist members in complying with any statute, regulation and government directive relating generally to the insurance business to create better understanding of insurance by all sections of the community to maintain constant dialogue with other trade associations to consult, co-operate with any individual, association within or outside Nigeria having objectives similar to those of the Association to promote cordial relationship among members (2 marks for any correctly stated role. Maximum of 4 roles to be graded. Total: 8 marks) (Grand Sub Total: 10 marks) b) The required documents that companies limited by shares other than those classified as small ones are supposed to submit annual returns of some documents and record to the corporate affairs commission not later than 42 days after their annual general meeting are: annual returns and financial statements of the company auditor’s report register of members of the company indebtedness of the company the directors’ report (2½ marks for each correctly stated document. Maximum of 4 to be graded. Total: 10 marks) c) Next Level Plc Statement of Financial Position as at 31st December 2018 N’000 N’000 ASSETS NON-CURRENT ASSETS: Property, Plant and Equipment (W1) 20,000 (1mark) CURRENT ASSETS Inventory 1,200 (1mark) Trade Receivables 830 (1mark) Cash at Bank 2,790(1mark) 4,820(1mark) 25,310(2marks Page 48 of 153 EQUITY AND LIABILITIES EQUITY 600,000 Ordinary Shares at N25 each 15,000 (1mark) 50,000 8% Preference Shares at N100 each 5,000 (1mark) General Reserve (W4) 3,078 (1mark) Retained Earnings (W5) 1,580 (1mark) 29,658 (1mark) CURRENT LIABILITIES Trade Payable 652(1mark) TOTAL EQUITY AND LIABILITIES: 25,310(2marks WORKING NOT