Business Planning Insurance 2020 Question Bank Sample

The Institute of Chartered Accountants in England and Wales
BUSINESS PLANNING:
INSURANCE
For exams in 2020
Question Bank
www.icaew.com
Business Planning: Insurance
The Institute of Chartered Accountants in England and Wales
ISBN: 978-1-5097-2634-9
Previous ISBN: 978-1-5097-2047-7
First edition 2016
Fifth edition 2019
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ICAEW examinations, and should not be used as professional advice.
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© ICAEW 2019
ii Business Planning: Insurance ICAEW 2020

Contents
The following questions are exam standard. Unless told otherwise, these questions are the style,
content and format that you can expect in your exam. The marking guides provided with the
answers are illustrative to help students understand how marks may be allocated in the exam
and to identify gaps in their answers.
Time Page
allocation
Title Marks Mins Question Answer
1 Elgins General plc 35 53 3 167
2 Seguins plc 42 63 5 173
3 Reliance Insurance 25 38 8 183
4 Syndicate 1505 30 45 9 189
5 Tensure Group 35 53 11 194
6 Frugal Life Assurance plc 40 60 14 196
7 Contego Insurance 25 38 17 202
8 Strete Life 35 53 19 204
9 Retire ResCare plc 40 60 20 206
10 Eurocover Insurance 30 45 23 212
11 Parkview Assurance 40 60 26 215
12 Longrose 30 45 28 220
13 Solano Insurance Company Ltd 34 51 31 223
14 Premiership plc 30 45 33 228
15 Tradesman's Insurance 42 63 36 232
16 ZazuCover Insurance plc 40 60 39 236
17 Nearly Human Pet Insurance 40 60 41 241
18 Prescotian Professional Insurance plc 46 69 44 246
19 Speedy Insurance 30 45 49 252
20 Tithonus 35 53 51 255
21 Methuselah 25 38 53 263
22 Borg 30 45 55 266
23 Sheraton Life 45 68 57 269
24 175 Insurance plc 27 41 59 274
25 Tektonik Group 28 42 61 277
26 Yifter 36 54 62 280
27 Jalopy 30 45 64 284
28 Yardbird 30 45 66 287
29 Clipeus Insurance 35 53 69 289
30 Magnus Insurance 38 57 70 293
31 Charybdis 40 60 71 298
32 Jared Life 30 45 73 301
33 Kirk 34 51 74 304
34 Farpoint 32 48 76 308
35 Milnerton 27 41 78 311
ICAEW 2020 Contents iii

Time Page
allocation
36 BRMA 30 45 80 314
37 Peace of Mind Motorcare Ltd 60 90 83 318
Sample examination
38 Pentagon Re 40 60 87 325
39 Predator Group 35 53 90 335
40 Anglo-Australian Annuities and
Assurance 25 38 93 344
June 2016 examination

41 Mettle 45 68 95 351
42 LMM Insurance 30 45 97 364
43 Lloyd's Syndicate 1404 and
Newfoundland Loss 25 38 99 371
September 2016 examination

44 Northern Annuities and Pensions 42 63 101 377
45 FettleFixers 30 45 103 386
46 Penny & Whistle 28 42 106 391
December 2016 examination

47 Homestead Household Insurance 44 66 108 399
48 Rutland Life 33 50 110 409
49 London Market Atlantic Re 23 35 112 417

50 Monmouth Insurance plc 40 60 114 422
51 Montgomery Life plc 30 45 117 433
52 Forest & Fens Direct plc 30 45 119 442

53 Hainan Homecare 40 60 122 450
54 Sag Life 30 45 124 460
55 Neat Insurance 30 45 126 470

56 Mostly Chilled Insurance 40 60 129 479
57 Tremendous Insurance 30 45 131 489
58 Everidge Life Assurance & Pensions 30 45 133 498
iv Business Planning: Insurance: Question Bank ICAEW 2020

Time Page
allocation

59 Osborne Insurance Group 40 60 135 505
60 Inmai Life 30 45 137 520
61 Adainver Life Pensions Solutions 30 45 138 529

62 Liberator life 40 60 141 538
63 Koko Insurance 30 45 143 546
64 Atlantic Travel Team Insurance 30 45 144 551

65 Welsh Life 40 60 146 558
66 Sizewell Insurance 33 49 148 565
67 Melchester Life 27 41 150 574

68 Costigan Life 42 63 152 581
69 Newbridge Consumer Insurance
Solutions 30 45 154 590
70 Western Ancillary 28 42 156 596

71 Casion Insurance 38 60 159 603
72 Dorian Insurance 33 49 161 608
73 Lydian Life 29 41 163 616
ICAEW 2020 Contents v

Question Bank topic finder
Set out below is a guide showing the Business Planning: Insurance syllabus learning outcomes,
topic areas, and related questions in the Question Bank for each topic area. If you need to
concentrate on certain topic areas, or if you want to attempt all available questions that refer
to a particular topic, you will find this guide useful. Due to the scenario style questions in this
examination a single question will generally cover a number of different topics. Therefore
questions should not be attempted until all areas covered by the question have been studied.
Syllabus learning Study Manual

Topic area outcome(s) Question number(s) chapter(s)
Life insurance risks 1h, 2h 8, 9, 19, 23, 26, 48, 2

54, 58, 67, 73
Reinsurance 1i 4, 22, 30, 33, 40, 43, 3
45
Lloyd's of London Various 4, 33, 43 3
Derivatives 2f 6, 20, 21, 48, 61, 72 5
Definition of insurance contract 3c, 3d 7, 9, 25, 45, 47 4
Claims development 1f 18, 24 1
Insurance liabilities/reserving 1k, 1l 15, 23, 18, 30, 41, 1
45, 49, 55, 59, 64,
70, 71
IFRS 4, Insurance Contracts 3a, 3b, 3c 1, 9, 12, 15,16, 17, 4
18, 19, 23, 46, 47,
52, 56, 69
IFRS 17, Insurance Contracts 3a, 3b, 3d 7, 8, 27, 28, 30, 31, 4
34, 35, 37, 60, 63,
65, 68
IFRS 13, Fair Value Measurement 3i 2, 3, 6, 24, 34, 59 10
6, 10, 23, 48, 51, 61,
Asset-liability matching 2e, 2f 67 6
9, 25, 26, 30, 54, 61,
Investment strategy 1j, 2f 69, 72 5, 6
Currency, interest rate and other 1j, 2g 10, 11, 19, 48, 51, 61 6
market risks
Professional ethics 5a–c, 5e 3, 13, 21, 26, 29, 31, 15
32, 38, 50, 53, 57
Industry ethics 5a–c 9, 17, 23, 36, 37, 42, 15
47, 53, 55, 64, 65, 69
Solvency II 3l 15, 32, 41, 52, 69 12
Corporate governance 2a 14, 15, 41,69 14
IAS 39/IFRS 9 – impairment 3f, 3h 2, 4, 31, 39, 62, 65 9
vi Business Planning: Insurance: Question Bank ICAEW 2020

Syllabus learning Study Manual
Topic area outcome(s) Question number(s) chapter(s)
IAS 39/IFRS 9 – 3e 2, 34, 49, 52, 53, 56, 7

classification/recognition 57, 59, 60, 62, 65
IAS 40, Investment Property 3e 21, 41, 58, 62 4
MCEV 4g 6, 11, 41, 58, 60 4
Risk management/hedging 2c, 2f, 3g 11, 20, 39, 44, 51, 6, 8
57, 62, 63, 67
Technology and big data 1n, 2i 1, 20, 22, 55, 57 1, 6
Audit procedures 4a, 4b, 4c 1, 2, 24, 29, 38, 39, 13
44, 47, 50, 53, 56,
59, 70, 71
Audit risks 4a, 4b 2, 24, 31, 38, 52, 59, 13
64, 66, 70, 71
Reliance on actuaries/internal 4d, 4j 3, 6, 11, 17, 50, 60, 13
audit 64
Internal controls/weaknesses 2g, 4a 1, 17, 18, 21, 44, 50, 1, 6, 13
55, 66
10, 14, 15, 24, 38,
Auditor’s reporting obligations 5d 44, 66 13, 15
ICAEW 2020 Question Bank topic finder vii

Exam
Your exam will consist of:
3 questions 100 marks

Pass mark 55
Exam length 2.5 hours
The ACA student area of our website includes the latest information, guidance and exclusive
resources to help you progress through the ACA. Find everything you need, from exam
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at icaew.com/exams.
viii Business Planning: Insurance: Question Bank ICAEW 2020

Question Bank
2 Business Planning: Insurance: Question Bank ICAEW 2020
Question Bank
1 Elgins General plc

You are an audit senior at Campbell Douglas (CD), a firm of ICAEW Chartered Accountants that
audits Elgins General plc (EG). EG is a UK insurance company that is listed on the London Stock
Exchange. EG's reporting date is 31 December.
EG targets its business at the short-term insurance needs of farming and small business
communities. The company's business objectives and strategy focus on developing the use of
market intermediaries such as agents and brokers. Key lines of business are public liability
insurance, employers' liability insurance, occupiers' liability insurance, loss of profits insurance,
crop insurance, livestock insurance and flood insurance.
The formal pre-engagement team meeting for the year ended 31 December 20X5 is about to be
held to discuss the audit strategy and plan, allocate responsibilities and communicate the audit
timetable.
You have been asked to audit the section on premium income.
During the meeting you have been provided with two extracts from the financial statements of
EG plc. EG prepares its financial statements under IFRS 4.
You have been provided with the draft financial statements (Exhibit 1 and Exhibit 2) and a
manager's note from the pre-engagement client meeting (Exhibit 3). Review these exhibits and
answer the requirements below.
Requirements
1.1 For premium income, prepare a schedule identifying the risks of misstatement in respect of
completeness of income. For each of the identified risks, suggest a key control that might
be implemented to mitigate these identified risks.
1.2 For insurance receivables shown in the statement of financial position:
(a) Identify the risks of material misstatement in respect of valuation; and
(b) Prepare an audit programme to address the risks that you have identified.
1.3 Prepare a list of the points to be included in the accounting policy note to the financial
statements in respect of the item insurance receivables shown in the statement of financial
position.
1.4 Review the manager's note in Exhibit 3 and draft a reply with your recommendations
regarding the proposed system.
Total: 35 marks
ICAEW 2020 Question Bank 3

Exhibit 1
Elgins General plc

Draft statement of profit or loss for the year ended 31 December 20X5
20X4 20X5
£'000 £'000
Income
Gross written premiums 50,608 51,504
Outward reinsurance premiums (8,426) (9,588)
Premiums written net of outwards reinsurance 42,182 42,916
Net change in provision for unearned premiums 10 22
Net earned premiums 42,192 42,938
Investment income 1,608 1,903
Other operating income 530 640
Expenses
Claims paid
 Gross claims 43,880 44,360
 Reinsurers' share of claims (10,210) (10,020)
Claims incurred net of reinsurance 33,670 34,340
Commission costs 7,652 8,030
Administration costs 488 523
Finance costs 30 28
Profit before taxation 2,490 2,560
Exhibit 2
Elgins General plc

Extracts from draft statement of financial position
Year ended 31 December 20X5
Assets
20X4 20X5
£'000 £'000
Insurance receivables
Gross receivables from direct insurance and inwards
co-insurance and reinsurance operations 13,907 14,308
Allowance for irrecoverable receivables 1,400 1,520
Net receivables arising from direct insurance and inward
reinsurance operations 12,507 12,788
Being:
Due from contract holders, brokers, agents and 12,001 12,166
intermediaries
Due from inward co-insurance and reinsurance operations 506 622
Net receivables from inward insurance operations 12,507 12,788

Exhibit 3
Elgins plc
Manager's note from pre-engagement client meeting
During my pre-engagement meeting with the CEO and CFO of Elgins they mentioned that the
premium income software had not been updated for six years. They believed that the software
was beginning to show a lack of features required to provide an efficient client service and to
sell more policies.
They are looking to build a new system that will accelerate the underwriting and quotation
process as well as the policy production process.
The management would like to push the insurance policy preparation process further forward
from the back office (ie, administration department) to the front office (ie, underwriters) and for
the system to improve cross-selling opportunities.
They have noted that many other insurance companies have implemented so-called end to end
policy management systems and wonder if this might be beneficial for Elgins.
The company has ample IT programming skills but lacks the business analysis and project
management skills to deliver a new system effectively and efficiently. In addition, EG's
management is keen to ensure that proper systems development controls are established to
ensure that any new system will be efficient and secure.
I have a further meeting scheduled with the company management in two days' time. Please
prepare a set of notes to help me discuss the proposed new premium income system with them.
Please consider how they might get the project started and achieve the objectives they have
outlined.
2 Seguins plc
Today's date is 10 January 20X6. You are an audit senior at DPKE, a firm of ICAEW Chartered
Accountants that audits Seguins plc. Seguins plc is a UK regulated insurance company. Its draft
profit for the year ended 31 December 20X5 is £323 million. Seguins prepares its financial
statements in accordance with IFRS 4 and IAS 39. It has no plans to adopt IFRS 17 early.
The formal pre-engagement team meeting for the upcoming year ending 31 December 20X5
is about to be held to discuss the audit strategy and plan, allocate responsibilities and
communicate the audit timetable.
You have been allocated the following audit areas:
 trading portfolio assets
 investment properties
 available for sale financial assets
During the meeting, you have been provided with extracts from the draft financial statements
and some explanatory notes, as shown in the following exhibits.
Requirements
You are required to prepare an audit file note to:
2.1 Explain the financial reporting treatment of the asset categories highlighted above and the
issues raised in Exhibits 2, 3 and 4. Your answer must cover the recognition and
measurement of financial assets held at fair value in accordance with IAS 39, Financial
Instruments: Recognition and Measurement and IFRS 13, Fair Value Measurement and the
appropriate treatment of the 'block discounts' that Seguins plc typically encounters on sale
of financial assets.

2.2 In respect of the three categories of financial asset listed above and in Exhibits 2, 3 and 4:
(a) Outline the key audit risks; and
(b) List suitable audit procedures to provide sufficient, appropriate evidence on the
valuation.
2.3 If Seguins' management declines to make the write down of £1.981 million in respect of
aviation loans (Exhibit 4), suggest what an appropriate response, if any, the auditor should
give:
(a) In the audit opinion on the financial statements;
(b) In the letter to those charged with governance in accordance with ISA 260,
Communication with Those Charged with Governance and ISA 450, Evaluation of
Misstatements Identified During the Audit;
(c) In formal reports to the Prudential Regulation Authority (PRA), under the duty to report
of s.342 of the Financial Services and Markets Act 2000; and
(d) In the auditor's annual bilateral private meeting with the PRA supervisor who
supervises the activities of Seguins.
Total: 42 marks
Exhibit 1
Extracts from draft financial statements at 31 December 20X5

Assets 20X5 20X4
£'000 £'000
Cash and cash equivalents 59,543 68,531
Financial assets designated at fair value 772,133 699,634
Investment properties 57,450 58,452
Derivatives financial instruments 60,114 55,690
Available for sale investments 129,157 137,682
Property, plant and equipment 25,679 28,665
Other assets 4,130 4,886
Total assets 1,108,806 1,023,540
Accounting policy note
Block discounts
Seguins is one of the largest investors on the London Stock Exchange and its investment
management team is widely respected for being good at identifying when to buy and sell
financial assets. As a result of this, Seguins often encounters difficulty when selling securities,
since the size of its holdings are so large that it can be difficult to find a buyer at the price quoted
in the market. The act of selling Seguins's holdings causes downward pressure on the price of
securities. The market often reacts to a sale of shares by Seguins as a sign that there may be
some reason to believe that those shares will fall in value. The company currently makes no
adjustment to fair value for these 'block discounts', but the board is currently considering
whether failing to make such an adjustment provides a true and fair view of asset values.
Financial assets designated at fair value
These assets are designated at fair value because either:
 the assets are managed, evaluated and reported internally on a fair value basis;
 the designation eliminates or significantly reduces an accounting mismatch that would
otherwise arise; or
 they were acquired principally for the purpose of selling in the short term. They may be
held as part of a portfolio that is managed for short-term profit making or position taking.
The designation results in more relevant information for users of the financial statements.

Available for sale financial assets (AFSFA)
Seguins uses this classification for assets that are not derivatives and are not held for trading
purposes nor at amortised cost.
Assets held at fair value (excluding derivatives) note
Valuation technique using
Quoted Significant
market Observable unobservable Total as at
prices inputs inputs 31 December
(Level 1) (Level 2) (Level 3) 20X5
£'000 £'000 £'000 £'000
Financial assets designated at
fair value 273,443 389,199 109,491 772,133
Investment properties 14,901 12,692 29,857 57,450
Available for sale investments 66,351 60,836 1,970 129,157
Totals 354,695 462,727 141,318 958,740
Exhibit 2
Extract from accounting policies from the draft financial statements

Trading portfolio assets – fair value through profit and loss (FVTPL)
Included within trading portfolio assets valued using Level 2 inputs is an investment in debt
issued by the Government of Kaylandia. There is not a market price available in this debt as it is
not actively traded. It is included at a value of £14,353,000 which is arrived at through using a
discounted cash flow model.
During the year ended 31 December 20X5 the market in Kaylandia government debt has
changed and the volume of debt traded has decreased from a very low level to virtually no
transactions occurring in the prior 12 months.
Seguins plc has previously used interest rates and prices of government debt in neighbouring
countries in the same geographical region as inputs in the modelling process. However, these
bonds, while still traded, vary significantly in price depending on who the parties to the
transaction are.
Seguins plc has arrived at the current valuation using the same assumptions as the prior year
given the very low trading volumes in the region.
Exhibit 3

Reclassification out of FVTPL
Financial assets designated at fair value include investments in private equity valued at
£8,980,000 on 31 December 20X5. The investment is valued using Level 3 unobservable inputs
as the portfolio is in majority family owned businesses and there are few share transactions.
The directors of Seguins plc have decided that these investments no longer meet the criteria for
designation as FVTPL and plan to reclassify them as available for sale financial assets to reflect
the most relevant use of the assets.
The investments are in high end fashion companies that have suffered falling sales.

Exhibit 4

Available for sale (AFS) assets
Seguins plc has invested in corporate loans and designated them as available for sale (AFS)
investments. The corporate loans have a balance of £35,100,000 (based on Level 1 observable
prices) at 31 December 20X5.
The corporate loans have a floating charge on assets and are a subordinated class. £6,450,000
of the total balance is made to the aviation sector and the Government has just announced that
significant taxes are to be introduced to air travel to meet global environmental targets.
The fair value of the aviation loans has fallen by £1,981,000 since 31 December 20X4 to take into
account the poor outlook for these companies.
3 Reliance Insurance
You are Mark Regev. You work in the internal audit department of Reliance Assurance.
Germaine Holden, the head of internal audit is presently negotiating internal audit's work
programme for the next financial year with the audit committee of Reliance.
The head of the audit committee would like the internal audit department to focus on testing to
ensure compliance with guidance from the Financial Conduct Authority. Germaine believes that
this testing adds little value, as it seldom discovers significant incidences of non-compliance.
Germaine would like the programme for internal audit to focus instead on assessing the quality
of work produced by expert valuers, in-house actuaries and various other more high level
factors.
Germaine has sent you a private, confidential email (Exhibit).
Requirements
3.1 Identify and explain the indicators in the Exhibit that suggest that the external auditor might
not be able to place much reliance on the work of internal audit.
3.2 Explain what work you would expect an internal or an external auditor to perform before
deciding they can place reliance on the work of an external expert property valuer.
3.3 Suggest reasons why the investment properties might have achieved a sales price 12%
below the most recent estimates of fair value, even if the fair values of those properties had
been determined properly in accordance with IFRS 13.
3.4 On the issue of purported whistle blowing:
(a) Using an appropriate ethical conflict resolution model, assess whether Germaine's
concerns are of sufficient magnitude to justify her proposed course of action; and
(b) Suggest, with reasons, an appropriate response you might take to Germaine's request
for advice from you on possible whistle blowing protection.
Total: 25 marks

Exhibit
Email from Germaine Holden

CONFIDENTIAL
Mark
Sorry to use your personal email address for work things, but I worry who might be reading my
work email. I want to be able to be blunt.
It's time for our annual battle about our work programme with the audit committee.
The audit committee is dominated by one non-executive director, who has a great fear of
non-compliance with Financial Conduct Authority (FCA) rules. That's been almost all of our work
in the last two years. Yawn! We seldom find anything wrong.
What we have done this last year is continue with the rolling programme of legal compliance
testing, but we've slipped in some testing of other matters that we in internal audit consider to
be important.
I'm alarmed by the fact that we sold two major investment properties this year for 12% below the
recent values given by the external valuers. I worry that the company may be carrying assets at a
value higher than their realisable value. I think we need to look at whether the external valuers
are doing their work properly.
I also worry a bit about the excessive degree of reliance that we place on the in-house actuaries.
I'm not sure that they are really questioning their own assumptions when they come up with
valuations. I fear that the models they are using haven't been updated in years, despite all the
changes in society and the industry.
If we don't get the audit committee to finally let us go beyond looking at the same, dull stuff year
after year, I think it might be time for us to escalate this. We're all ICAEW members: we didn't
study for so long just to tick and bash legal compliance checklists. I'm wondering about what
protection I would get for whistle blowing if I were to take this to the press. What do you think?
You qualified much more recently than me, so I'm looking to your more recently acquired
knowledge for advice!
4 Syndicate 1505
You are Margaret Atherton. You work in the internal audit function of Syndicate 1505 in the
Lloyd's market in London. The syndicate writes a variety of risks, although it specialises in
reinsurance policies. During the current year ending 31 December 20X6, the syndicate has
continued to suffer considerable losses arising from (fictional) Catastrophe 14J (Exhibit 1). This
has had a number of consequences, including a review of the syndicate's own reinsurance
policies. Some corporate members of the syndicate are also suggesting that they may wish to
leave the Lloyd's market.
During the current year, losses have continued to come in for the 14J loss, even though the
ongoing disaster was declared over early in 20X5. Syndicate 1505 has made claims on some of
its own excess of loss reinsurance policies for cumulative claims on perils covered by the 14J
loss, using the first layers of its excess of loss protection. The syndicate is now seeing 14J-related
claims come back into the syndicate, as other companies and Lloyd's syndicates make claims on
high level excess of loss policies that Syndicate 1505 has taken a line on. On the more positive
side, insurance premiums generally have risen somewhat since the 14J losses.
One of the private limited liability members of the syndicate has decided that she wishes to
leave the Lloyd's market and has asked for your advice on how she might achieve this (Exhibit 2).
The size of the 14J losses has caused some rumours about the ability of some of Syndicate
1505's reinsurers to pay (Exhibit 3).

Requirements
4.1 Prepare the note for James Baker that explains:
(a) How the syndicate managing agent might be able to mitigate the syndicate's losses in
the 20X5 underwriting year; and
(b) Whether members are able to be sure that there will be no further claims on their cash
after they have left the market.
4.2 Explain the likely reasons for why the 14J loss (fictional) has become an especially large
loss.
4.3 Briefly explain why insurance premiums may have risen across the industry after the 14J
losses.
4.4 Suggest how a Lloyd's syndicate can mitigate its exposure to the risk of exposure to loss
spirals.
4.5 In respect of the potentially impaired reinsurance recoveries (Exhibit 3):
(a) Explain the impact on the financial statements of the syndicate if future expected
claims on reinsurance policies are impaired; and
(b) Assess whether rumour is sufficient evidence to impair a reinsurance recoverable
under the rules of IAS 39 and IFRS 9.
Total: 30 marks
Exhibit 1
Extract from Lloyd's website
Short description of Catastrophe 14J (fictional)
Blowout of the 'Explorer Nimrod' wellhead and platform, drilling exploratory drill offshore in
Alaska, 7 December 20X4. Explosion, eight dead, large environmental damage to area of
outstanding natural beauty. Slow response blamed on dispute over identify of responsible party
(joint operated platform). 2.2 million barrel spill. Wellhead capped 24 February 20X5. Facts
similar to Cat 10E Deepwater Horizon.
Exhibit 2
Note from James Baker, managing agent of Syndicate 1505
Margaret
I've received a request from Veronica Grainger, who is a private member of the syndicate. She is
a limited liability member, who joined on 1 January 20X3, just before our current run of bad luck
started.
Veronica wants to leave the market. She knows that she has limited liability, but she has lost a
considerable sum since joining and she wants out. She has asked us to advise her on what her
options are.
She seems concerned about losing her tax losses, but she said to me something along the lines
of "I'm stuck on a runaway train here. I want out as quickly as possible and I want to be sure that
I'll not have to pay out any more money after I've got out".

Exhibit 3
Note of internal audit team meeting, 25 May 20X6
Reinsurance recoveries
One of the ways we control the risk of exposure to insolvent reinsurers is we pay Sir Hugh
Duckinfield, a well known figure in the London insurance industry, to inform us of rumours in the
market about whose solvency appears to be deteriorating, or any other reason why we might
want to avoid them. His expense account is considerable, but a worthwhile investment when
looking at the size of exposures we have.
Hugh produces a confidential summary each month, which we give to underwriters and also the
finance team.
Hugh has raised a concern about Shibuya Re's ability to pay on reinsurance policies that we are
likely to use as the longer-tail elements of the 14J losses continue to grow. Shibuya is registered
in Tokyo. Syndicate 1505 has purchased reinsurance from Shibuya on this policy for each of the
last 10 years. At this stage, there is no firm evidence that the company is encountering difficulty,
but Hugh is often right, so we have added Shibuya's name to the 'do not deal with' list for
outward reinsurance.
We have also informed the finance team, who are unsure as to whether it is appropriate to
impair a reinsurance receivable on the basis of rumour, or whether they have to wait for a formal
announcement of the company being in difficulties. The finance team have asked us to research
whether the answer would be different after we adopt IFRS 9 in a few years' time.
5 Tensure Group
Tensure Group acquired the general insurance book of Smarts Insurance which includes its
'Gold Account' customer base for home insurance and motor insurance liabilities in late 20X4.
Smarts continued as a broker/distributor for referral to Tensure Group for such qualifying
customers in future. The qualification of a 'Gold Account' customer is a household income of
more than £100,000 or a house valued at more than £250,000. Tensure and Smarts continued to
compete within other customer segmentations but with Smarts receiving a commission payment
for appropriate 'Gold Accounts' referrals to Tensure in the future.
Smarts is a general insurer and specialises in mainly home and contents insurance for high net
worth individuals. It mostly acquires its business via third-party referrals coming from financial
advisers who tailor their advice to only doctors, lawyers and dentists, with Tensure focused on
the mass market. Following the acquisition, servicing, claims management and new business
functions were centralised to Tensure's head office and policy information was migrated over
onto the main policy administration system (PAS).
Tensure has always experienced high volumes of turnover in staff at its head office policy
administration function. This has never given cause for concern as the PAS included structured
workflow, and all new staff members underwent a thorough training process which included
quality assurance reviews of their first six claims or other transactions that the staff member
processes.
No changes were made to Tensure's PAS to accommodate the acquisition. Instead, the new
policies were recorded and claims managed through a series of manual additional processes
designed by Smarts' senior policy team. Quality assurance monitoring results of staff members'
first six cases showed these processes were successful.
A large factor in Tensure's decision to acquire Smarts was its intention to expand into the high
net worth market, with this acquisition being an opportunity to build data on the claim
experience relating to this type of client.

A recent internal review of home and contents policies had highlighted numerous instances of
mis-recording of data when policies are set up and when claims were received. Due to the
considerable extra time and effort required as part of the additional manual processes for the
Smarts policies, in peak times when staff were under pressure to process volumes of business
cases, the simpler standard process had often been incorrectly made to fit. For example,
household policies which include some elements of bundled accident insurance had been
recorded simply as household perils. This led to claims on such policies for theft of property
outside the home and even some personal injury elements (eg, occupiers' liability) being shown
as simply property damage.
You have been asked to consider the impact to Tensure's recently established five-year growth
strategy which is largely based on anticipated expansion in high net wealth business.
You have been provided with sample data from the internal review (Exhibit 1 and 2); the quality
assurance manager who conducted the review believes this is a representative sample of the
types of error being made when recording claim reports. Additionally, you have been provided
with a note from Maria Swanson (Exhibit 3) who is a senior claims handler.
Requirements
Using the information provided here, you have been asked to produce a summary report to the
financial controller of Tensure covering the following areas:
5.1 The likely impact on financial and regulatory reporting if the sample provided is found to be
representative.
5.2 Identify and explain the risks to Tensure of integrating the Smarts acquisition into the
Tensure Group.
5.3 Identify and evaluate the risks and benefits to Tensure of expanding its activities into the
high net worth market, based on its short experience with Smarts.
5.4 Identify and briefly explain the likely disadvantages of moving customer data (such as
claims data) from Smarts to Tensure's accounting and administration system.
Total: 35 marks
Exhibit 1
Sample of claims reported from internal audit review of claims. Read this alongside Exhibits 2
and 3.
1 Policy holder reported that their washing machine had leaked water during use ruining
kitchen flooring.
2 Policy holder reported that they had accidentally knocked over and broken their TV when
decorating.
3 Personal injury claim of a friend who was helping the policy holder with land clearance
using a small tractor that was poorly maintained. The tractor brakes did not work properly
causing it to roll onto the claimant's friend's leg, resulted in the friend being unable to work
– who is self-employed and is claiming £8,250 in lost earnings.
4 Policy holder reported a burglary of antique motor car from locked garage.
5 Faulty electrics causing small fire and extensive damage to bedroom requiring new
bedroom furniture, carpet and decoration.
6 Policy holder reported the loss of an engagement ring.
7 Policy holder reported that during a storm a chimney was destroyed and also caused
damage to garden furniture which must be replaced.
8 Policy holder reported that a neighbour has claimed for damage to their car when a tree on
the policy holder's property fell during a storm.

9 Policy holder reported that they returned home from work to find house burgled with
several items of jewellery stolen, together with several other valuable items, and that
damage had been caused to items of furniture during the break in.
10 Policy holder reported water and other damage to their bathroom when drilling through a
water pipe while affixing a cabinet to the wall.
Exhibit 2
PAS extract relevant to sample claim reports in Exhibit 1, provided by internal audit
Policy Claim
holder Policy Peril Claim paid 'Case reserve' incurred
£ £ £
1 Household Accidental Damage 0 2,000 2,000
2 Household Accidental Damage 650 0 650
3 Household Accidental Damage 2,500 5,750 8,250
4 Household Theft 0 4,000 4,000
5 Household Accidental Damage 1,800 0 1,800
7 Household Accidental Damage 3,700 4,200 7,900
8 Household Accidental Damage 0 4,000 4,000
9 Household Theft 0 5,000 5,000
Exhibit 3
Note from Maria Swanson – Senior Claims Handler

As discussed, I have reviewed the sample claims report (Exhibit 1) and PAS extract (Exhibit 2)
and believe there are a number of errors. In my opinion, based on the information provided in
the report, the following corrections would be required:
Policy holder 3:
This should have been recorded under occupier's liability, not accidental damage. I would also
suggest that a reserve should be made for additional claims from the policy holder's friend.
Currently, it appears that only the claim for lost earnings has been considered, but in my
experience related costs are likely (such as physiotherapy costs) and would suggest a further
£2,000 is provided for.
Policy holder 5:
This should have been recorded under 'fire', not accidental damage.
Policy holder 7:
This should have been recorded as 'wind storm', not accidental damage.
Policy holder 8:
This should have been recorded under occupier's liability, not accidental damage.
Hope this information is of use. Please do not hesitate to contact me if you require anything
further.

6 Frugal Life Assurance plc
You are Felix McAndrew. You are a recently qualified ICAEW Chartered Accountant, who works
for Frugal Life Assurance plc (FL) in the risk management and internal audit division. FL is a
medium-sized UK-registered life insurance company, which is listed on the London Stock
Exchange. It has traded for many years, focusing mostly on direct selling to a wide range of
different customers. It does not write general insurance business, but does write term life, whole
life assurance, pensions and annuities.
In recent years, it has found that the cost of acquiring new business direct from customers has
increased substantially, as it has had to pay ever more in marketing and commissions to brokers
and price comparison websites that act as agents.
In light of this, the board of FL has recently decided to focus more on the management of group
life policies and group pension policies. It has recently succeeded in obtaining the contract to
manage the savings and pension plan of a major national electricity company. Outline details of
this are given in Exhibit 1 below.
FL prepares its financial statements in accordance with IFRS 4. It does not intend to adopt
IFRS 17 before it becomes mandatory.
Requirements
6.1 Compare the commercial risks and benefits for FL of obtaining large volume business such
as group life policies and pensions management, compared with obtaining business
directly from private individuals.
6.2 How should the company's asset-liability matching strategy be amended in light of the risks
and benefits identified above?
6.3 Reply to the instructions from James Canterbury in Exhibit 2.
6.4 Explain which level of fair value methodology under IFRS 13, Fair Value Measurement you
would be likely to use for the interest rate swaps mentioned in Exhibit 4.
6.5 Discuss the degree to which you are able to provide assistance to the external auditor
(Exhibit 4), having regard to specific rules of ISA and professional ethics.
Total: 40 marks
Exhibit 1
Note to the senior management team of FL from Holger Ottmann, CEO

Memo
Congratulations to us, we did it! After our presentation to Powerwell Electricity last month, I am
delighted to be able to tell you that they have agreed to move their staff money purchase
pension plan from The-Competitor-Who-Shall-Not-Be-Named to us. This is going to happen in
three months, so we will start to see the benefit soon. The 20% or so of their funds that relate to
their staff outside the UK will move over the month after that.
We all put a lot of work into this, but I am pleased to note that the total cost of this bid was so
much lower compared with the costs we're spending on social media. One pitch document, one
presentation and it was all ours. I think that this is an important way forward for us to build scale
quickly. Given that our accounting policy is to write off costs of acquiring new long-term
business in full in the year that a new policy incepts, the less we spend on marketing costs, the
better.
Congratulations to all of you and thank you for your efforts. I will be making an announcement
about this to the staff tomorrow.

Exhibit 2
Email to Felix McAndrew from James Canterbury, Head of Investor Relations

Felix
I believe that you are aware of the big win of the Powerwell business. I'm thinking about the
impact that this is likely to have on both our IFRS financial statements and Market Consistent
Embedded Value (MCEV) statement.
I have my own ideas, but (being an engineer by training rather than an accountant!) I always
like to get an independent opinion from an accountant before I open my mouth in front of
shareholders about how any change in the business is likely to affect the financial statements.
I'd be grateful for your thoughts on how the acquisition of the Powerwell business is going to
affect the required capital, free surplus and value of in-force business and so affect total MCEV.
As there are two principal types of product that we're taking on for Powerwell, I guess that I'm
looking for an answer (in whatever format) that covers these six items:
Simple unit-linked savings Annuities

(no death benefits)
Required capital
Free surplus
Value of in-force business
What I want to know is would you expect each of these six items to go up, to go down or to
remain the same? I've provided an extract from last year's embedded value report for reference,
in case that helps generate ideas (Exhibit 3).
The unit-linked savings are money purchase pension plans. These have no death benefits. We
are able to charge annual management fees of 0.25% of funds under management.
The annuities will come to us with the assets based on standard actuarial tables, in accordance
with Powerwell's agreement with their current provider. However, we believe firmly that most of
Powerwell's staff have a life expectancy three years shorter than standard national actuarial
assumptions.

Exhibit 3
Extract from FL's MCEV report for the year ended 31 December 20X5
Value of
Required Free Owners' in-force
capital surplus equity* business MCEV
£'000 £'000 £'000 £'000 £'000
Opening MCEV 50,564 28,443 79,007 97,665 176,672
Injections in the first six
months of the year – 33 33 – 33
New business value 4,798 (10,244) (5,446) 7,890 2,444
Expected contribution
at reference rate 32 986 1,018 1,232 2,250
Expected contribution
above reference rate 43 1,875 1,918 1,977 3,895
Expected transfer to
owners' equity (4,118) 10,218 6,100 (6,100) –
Operating variances 2,002 144 2,146 (1,420) 726
Embedded value
operating earnings 2,757 2,979 5,736 3,579 9,315
Economic and non-
operating variances 892 922 1,814 1,886 3,700
Embedded value
earnings 3,649 3,901 7,550 5,465 13,015
Dividends in the last six
months of the year – (4,120) (4,120) – (4,120)
Other movements eg,
foreign currency 129 212 341 484 825
Closing MCEV 54,342 28,436 82,778 103,614 186,392
* Owners' equity means shareholders' equity.
Exhibit 4
Email to Felix McAndrew from Bob Dawson, financial controller of FL

Felix
I'm under a fair bit of pressure to reduce the fee for the external audit. As until last year, you
used to work for our firm of external auditors, I expect that you're familiar with their ways of
working.
I appreciate that you have lots of work in internal audit, but I would like to temporarily assign you
to help the external auditor. I know that you have been working on building a model to value
some of our over-the-counter derivatives, especially certain interest rate swaps.
I'm sure that the external auditor will want to look at this, so it might make things go more
smoothly if you are assigned to the external audit team for this upcoming January and February,
being the two months after our year end.
I've not spoken yet with the external auditor about this, but how do you feel about this? Would it
be too disruptive to your other work? Please let me know your thoughts.
Bob

7 Contego Insurance
It is July 20X8. You are Vijay Shankar, a final year trainee ICAEW Chartered Accountant. You are
employed in the finance department of Contego Insurance plc (Contego). Contego is a general
insurer with a financial year end of 31 December. Its main business line is motor vehicle
insurance.
Contego's board has decided voluntarily to adopt IFRS 17 and IFRS 9 from the year ending
31 December 20X8. Contego has assessed that it is able to apply the premium allocation
approach to the measurement of all its insurance contracts under IFRS 17.
Contego has experienced significant problems in the past when implementing financial
reporting changes, so it has established an implementation team. You are a member of that
team. It has been decided that as a trial run the implementation team will look at how IFRS 17
would be applied to the portfolio of motor policies written in the first six months of the financial
year. A breakdown of these policies is provided as Exhibit 1.
Currently all policies written by Contego are for a period of 12 months and all premiums are
payable upfront. At 30 June 20X8 claims reserves for claims reported totalled £15.6 million, and
Contego estimates IBNR (including IBNER) as 3% of total annual premiums for private motor and
4.5% of premiums for commercial motor. All case reserves and IBNR are expected to be paid by
30 April 20X9. Acquisition costs for motor policies written in the six months to 30 June 20X8
were £10 million.
The implementation team has also received information from the underwriting department
(Exhibit 2) and the head of product development (Exhibit 3) containing information that they
believe may be relevant.
Requirements
7.1 In relation to motor policies entered into during the first six months of the financial year,
using only the information provided in Exhibit 1, calculate:
(a) The components of the insurance service result for the six months to 30 June 20X8;
and
(b) The total insurance liability at 30 June 20X8.
7.2 Explain and quantify the implications of the information contained in Exhibit 2 on the
insurance result and insurance liabilities calculated in requirement 9.1 above.
7.3 Explain the financial reporting implications of the expected additional features to be added
to private motor insurance policies written from September 20X8 (Exhibit 3).
Total: 25 marks

Exhibit 1
Breakdown of policies written in the six month to 30 June 20X8 and related reported claims
Information for six months to 30 June 20X8 extracted from the accounting system of Contego
Premiums Private motor Commercial vehicle Total
£m £m £m
January 28.0 34.5 62.5
February 22.6 23.7 46.3
March 24.8 26.0 50.8
April 17.1 15.9 33.0
May 18.2 20.6 38.8
June 26.2 31.4 57.6
Total 136.9 152.1 289.0
Assume all policies are written in the middle of the month.
Reported claims Private motor Commercial vehicle Total
£m £m £m
January 1.1 1.6 2.7
February 2.0 2.8 4.8
March 3.0 4.0 7.0
April 3.7 4.8 8.5
May 4.4 5.7 10.1
June 5.5 7.2 12.7
Total 19.7 26.1 45.8
At 30 June 20X8 case reserves related to unpaid reported claims were £15.6 million.
Exhibit 2
Note from internal audit

Premiums are quoted for all policies at a level expected to lead to a profit. Due to a systems
error involving the use of private motor claims data during June 20X8 premiums on commercial
vehicles were set too low for some commercial policies written in these months. This was
rectified later in the year. Nonetheless, Contego estimates that policies were written with
premiums of £18.4 million where expected total claims on these policies written in June 20X8
are expected to exceed premiums by 25%.

Exhibit 3
Note from product development

We are going to add a couple of features to private motor policies that we write from
September 20X8 onwards.
As you know Contego has diversified its operations by purchasing a chain of motor repair
garages which perform insurance repairs on vehicles insured by Contego and other insurers. In
the second half of the year we intend to include in all private motor policies a free safety check
including wheel balancing and alignment in the first month of cover. The garages normally
charge £75 for this service when provided separately.
Additionally where a private motor policy has a total premium quoted in excess of £800, we will
offer the customer the option of paying the premium in 12 monthly instalments in return for an
increase of 10% in the premium.
8 Strete Life
The date is 15 September 20X8. You are Randall Crawford, a recently qualified ICAEW
Chartered Accountant. You are employed as an internal auditor at Strete Life plc (SL). SL's
principal business lines are annuities and term life insurance. The standard terms of SL's term
life policies include inflation protection for death benefits. This is achieved by indexation against
a UK inflation index. SL intends to adopt IFRS 17 on a voluntary basis for its year ended
31 December 20X8.
In preparation for the adoption of IFRS 17, the internal audit team has been tasked with carrying
out a review of the readiness of SL's systems to generate the necessary information to produce
financial statements in accordance with IFRS 17.
You report to Antigone Wilson, who is the head of internal audit. She has sent you an email
(Exhibit 1) containing a number of questions to which she requires answers.
Requirement
Reply to the questions raised by Antigone in her email (Exhibit 1).
Total: 35 marks
Exhibit 1
Email from Antigone Wilson, head of internal audit

To: Randall Crawford
From: Antigone Wilson
Work related to adoption of IFRS 17
Hi Randall,
I have read some of IFRS 17, but don't feel that I fully understand it yet. I know you have recently
been on a course about it, so perhaps you could help me understand how the general
measurement model is applied to annuities we sell.
It would really help if you could explain how the general measurement model would apply to
our annuities. Below is a particular portfolio of policies that I'd like you to use to illustrate the
effect of IFRS 17.
1 Explain and present the initial recognition for group of single life annuities we sold for
£1.9 million on 1 January 20X8 with payments expected to be paid for the next 23 years.
The present value of these cash outflows has been correctly calculated at 1 January 20X8
at £1.268 million, using our discount rate of 2.5%. Our actuaries have told us that an
appropriate adjustment for non-financial risk would be 2% of the present value of future
cash outflows.

2 Assume £100,000 is paid out under these annuities on 31 December 20X8 in line with initial
estimates, all our assumptions remain unchanged and the present value of the remaining
future cash flows is £1.17 million at this date. The proceeds from the sale of the annuities
were invested in a portfolio of bonds earning a return of 2.85%. The payment to annuitants
was funded by the realisation of a proportion of this portfolio.
For the annuities sold on 1 January 20X8, prepare a reconciliation of the opening balance
to the insurance contract liability at 31 December 20X8 (breaking down the changes in the
each of the components of the insurance liability). Present the information that would be
contained in the statements of profit or loss and financial position for the year ended
31 December 20X8 relating to the annuities and the related investments.
3 In relation to our term life insurance business, I have asked our actuaries to confirm whether
they are in a position to provide all the information that will be required to calculate the
insurance liability at the year end using the general measurement model of IFRS 17. I have
sent you their reply (Exhibit 2).
Please analyse whether the information provided by the actuaries, described in their reply,
will be appropriate for us to use in implementing the general measurement model of
IFRS 17.
4 Please identify and explain the main assumptions that the actuaries will use in estimating
the liabilities related to life policies that the actuaries refer to in paragraph 3 above. Briefly
explain the implications of any future changes in these assumptions.
Exhibit 2
Note from actuaries regarding term life insurance liabilities

We have always provided information on liabilities related to expected claims from term life
policies in force necessary to calculate the insurance liability at the year end. We make sure that
estimates of future claims use very cautious assumptions to avoid any chance of understating
insurance liabilities. We discount to present value any cash flows expected to occur more that
12 months in the future. We use a discount rate set at 2.5% below the return expected from the
investment portfolio backing the term life liabilities. I believe that this information will be exactly
what you require to implement IFRS 17.
9 Retire ResCare plc

Ken Chang is a senior member of the internal audit team at Retire ResCare plc (RRC), a listed
company that specialises in the provision of long-term residential care policies for the elderly.
The company reports its results under IFRS 4, and does not intend to voluntarily adopt IFRS 17
early. Due to the falling number of sales and the increase in the number of complaints, Ken has
been asked to review the continuing sale of long-term care (LTC) plans.
As part of this review, Ken has noted that the cost of funding an LTC policy is taken up front. In
most cases this is met from the sale of the insured's home.
The policy provides for residential long-term care and medical treatment for the rest of the
policy holder's life. The cost of the care plan is assessed after the applicant has been the subject
of a medical examination. After the medical is completed, an underwriter then determines a
premium, which the proposer of the insurance decides to accept or reject.
The policies make a greater profit for the company if the life assured dies earlier than the
actuarial estimate, but will make less profit than expected and may make a loss if the life assured
lives longer than expected at the time that the premium was determined. Premiums are not
adjusted for the life of the LTC contract. No additional premium is charged to the policy holder

if the cost of care is more expensive than expected, nor are any refunds made if the policy
holder dies earlier than expected, unless they die within six months of the policy being taken up.
Once the premium has been received, the company invests the amounts received in a
diversified portfolio of investments. These are then progressively sold over the term of the policy
holder's care, in order to provide cash to fund their care. The current mix of investments held is
provided (Exhibit 3).
As part of his review, Ken is considering data on sales volume, persistency and complaints. He is
also interested in the number of policies where a premium has been offered but the proposer
has not taken up the insurance (NTUs).
To be able to sell the policy, the advisers have to undergo additional training. They also have
regular accompanied interviews as part of their continuing professional development.
This poses yet more questions for Ken and before he presents his findings to the head of sales
he needs more information.
Requirements
9.1 Explain whether or not RRC is an insurance company.
9.2 Set out the financial reporting implications of the revenue raised from premium income
being taken up front for the LTC plan. Recommend:
(a) A suitable accounting policy for the cash flows associated with the acquisition of a new
policy; and
(b) Suitable arrangements for protecting policy holders' premiums that have been paid in
advance.
9.3 Identify the risks to the company of selling LTC policies. Comment on options for mitigating
the risk to the company of clients living longer than expected.
9.4 Discuss the ethical considerations to the insurer and customer in the writing and selling of
LTC insurance. Suggest some steps that should be taken to ensure that ethical standards
are maintained at an appropriate level.
9.5 Outline the considerations that the company should have when deciding an appropriate
mix of investments to hold. Comment on the suitability of the current investments profile
(Exhibit 3).
Total: 40 marks

Exhibit 1
Period Life Table (20X3) provided by the company's actuary

For this table, the period life expectancy at a given age is the average remaining number of
years expected before death for a person at that exact age, born on 1 January, using the
mortality rates for 20X4 over the course of their remaining life.
Male Female
Death Number Life Death Number Life

Exact age probability of lives expectancy probability of lives expectancy
69 0.021766 75,185 14.81 0.014529 84,039 17.09

70 0.023840 73,548 14.13 0.015991 82,818 16.33
71 0.026162 71,795 13.47 0.017662 81,494 15.59
72 0.028625 69,917 12.81 0.019486 80,054 14.86
73 0.031204 67,915 12.18 0.021467 78,494 14.14
74 0.033997 65,796 11.55 0.023658 76,809 13.44
75 0.037200 63,559 10.94 0.026223 74,992 12.76
76 0.040898 61,195 10.34 0.029159 73,026 12.09
77 0.045040 58,692 9.76 0.032331 70,896 11.44
78 0.049664 56,048 9.20 0.035725 68,604 10.80
79 0.054844 53,265 8.66 0.039469 66,153 10.18
80 0.060801 50,344 8.13 0.043828 63,542 9.58
81 0.067509 47,283 7.62 0.048896 60,757 9.00
82 0.074779 44,091 7.14 0.054577 57,786 8.43
83 0.082589 40,794 6.68 0.060909 54,633 7.89
84 0.091135 37,424 6.23 0.068019 51,305 7.37
85 0.100680 34,014 5.81 0.076054 47,815 6.87
86 0.111444 30,589 5.40 0.085148 44,179 6.40
87 0.123571 27,180 5.02 0.095395 40,417 5.94
88 0.137126 23,822 4.65 0.106857 36,561 5.52
89 0.152092 20,555 4.31 0.119557 32,655 5.12
90 0.168426 17,429 4.00 0.133502 28,751 4.75

Exhibit 2
Data from the company's customer relations department

Number of complaints the company received between January and June 20X5
Insurance and pure protection
Decumulation, life and pensions
Number of Number of Complaints

complaints complaints closed within Complaints
opened closed 8 weeks upheld by firm
Long-term care/home 1,156 1,063 84.1% 85.6%

finance
General insurance and 271 270 96.2% 24.1%
pure protection
Decumulation, life and 8,827 7,501 97.5% 62.1%
pensions
Investments 1,532 1,439 97.2% 79.8%
Exhibit 3
Current split of investments held, as advised by the company's own finance department
%
Investment properties 22
UK equities 29
Non-UK equities 17
UK government bonds 18
Non-UK government bonds 8
Derivatives held for trading 6
Total 100
10 Eurocover Insurance
Jim Cowdray has been given the task of leading the annual audit of Eurocover Insurance plc
(Eurocover). Eurocover is a major, long-established composite insurance company, listed in the
UK. It sells life, pensions and general insurance.
The general insurance side of Eurocover's business writes business throughout the European
Union, with particular emphasis on motor insurance in Italy.
The life business is solely written in the UK with a large proportion of the business being a
number of group pension schemes written in conjunction with a number of large employers.
Exhibits 1 and 2 are notes of telephone conversations between Jim and the head of internal
audit.
Exhibit 3 describes the breakdown of the long term insurance assets of Eurocover.

Requirements
10.1 Describe the steps you would expect to be taken to mitigate the general insurance
business's exposure to currency fluctuations on claims payments that need to be made in
euros.
10.2 Describe the regulatory implications that a lack of robust systems and controls in the
treasury department might create. Outline the criteria you would use to determine whether
it is necessary to report your concerns to an appropriate regulator.
10.3 Evaluate and describe the information that you would require to be able to establish that
the pension liabilities were adequately matched, both in terms of quantity of assets held
and the term of the assets held.
10.4 With the current low interest environment and interest rates expected to rise, evaluate and
describe the impact that this will have on fixed interest bond prices and briefly outline the
meaning and use of duration in this context.
Total: 30 marks
Exhibit 1
Note of telephone conversation between Jim Cowdray and Eurocover's head of internal audit
• The treasury department appears to be experiencing difficulty in assembling the required
information.
• I have yet to see evidence of any details of euro assets with the exception of non-UK shares
or evidence of mitigation of the currency risk.
• Most of the assets identified to date seem to be medium-term investments (five–10 years).
• The possible lack of clear asset control systems as concerns the internal auditor.
Exhibit 2
Note of telephone conversation between Jim Cowdray and Eurocover head of internal audit
To (see Distribution list)
Date: 31.12.20X6
Audit Report
Asset Management Controls
Report Date: 31.12.20X5
Distribution List:
Finance Director
Head of Audit
BACKGROUND
The department is responsible for acquisition and disposal of assets and the management of
claims payment funds.
SCOPE
The scope of the audit includes:
 analysis of asset allocation
 transactions for the six-month period ended 30 June 20X5
 review of documentary evidence of the disposal and purchases

OBJECTIVES AND RESULTS
The audit evaluated the adequacy of controls and processes to achieve key business objectives
as it related to the purchase and disposal of assets. Set out below are the business objectives
and related control assessment (Satisfactory, Needs Improvement, Unsatisfactory) and a
summary of good and weak controls noted in the audit.
Business objective Control assessment
Ledgers are well maintained Satisfactory
Rationale for acquisition of assets Needs improvement
Disposal of assets Unsatisfactory
Control summary
Good controls Weak controls
 Account ledgers are accurate and well  Management information is weak with a
maintained. limited number of reports; this makes it
difficult to establish a clear picture of the
 Claims payments are quickly
activities of the department.
reconciled and paid.
 Minutes of investment allocation meetings
are brief and don't provide sufficient detail.
 It is unclear if there is a defined policy for
holding euro assets to make Italian motor
claims payments.
Exhibit 3
Draft Management Account Information

Long-term insurance assets
Assets backing non-profit liabilities and non-profit capital requirements
Unadjusted Expected Yield before
assets income adjustment
£'000 £'000 %
Land and buildings 11,427.0 7.5 0.05
Approved fixed interest securities 242,552.0 7,913.0 1.82
Other fixed interest securities 361,989.0 7,239.0 0.95
Variable interest securities 8,405.0 417.0 5.67
UK listed shares 1,029.7 358.0 4.76
Non-UK shares 557.0 23.0 4.71
Unlisted equities 13,193.0 – –
Other assets 628,710.0 578.0 0.09
Total 1,277,130.0 16,535.0 0.74

Assets backing with-profits liabilities and with-profits capital requirements
Land and buildings 683,853.0 26,790.0 3.86
Approved fixed interest securities 1,563,067.0 51,233.0 1.84
Other fixed interest securities 1,522,836.0 62,006.0 2.98
Variable interest securities 9,764.0 284.0 0.84
UK listed shares 660,136.0 21,811.0 4.65
Non-UK shares 1,133,490.0 31,789.0 4.43
Unlisted equities 307,264.0 – –
Other assets 806,260.0 (1,345.0) (0.35)
Total 607,169.0 192,567.0 2.98
11 Parkview Assurance
You are Eileen Lee and are employed by Parkview Assurance (PA) in the risk management
department. PA is currently the twelfth biggest life insurer in the UK. It is looking to grow by
merger and acquisition activity in order to deal with a problem perceived by the board of
directors that PA is currently below optimal size/scale.
PA is looking at acquiring a controlling interest in Allerton Life (AL), a fellow life insurance,
savings, pensions and annuities business, which is based in Switzerland.
You have been asked by Veronica Glass, who is the head of your department, to assist in
preparing a board paper that looks at the possible acquisition, together with a request to
discuss possible ways to reduce the risk of exposure to variable interest rates.
Requirements
11.1 Reply to the email from Veronica Glass (Exhibit 1).
11.2 Embedded values are sensitive to interest-rate changes. Suggest and briefly explain ways
in which a writer of long-term business might mitigate the exposure to interest rate
increases.
Total: 40 marks
Exhibit 1
Email from Veronica Glass

To: Eileen Lee
From: Veronica Glass
Re: Possible acquisition of Allerton Life
Hi Eileen
I have been asked to do some preliminary investigation into the acquisition of AL.
The board is proposing to make an offer for the purchase of AL based on its embedded value, rather
than on its balance sheet value or reported IFRS earnings. AL is a younger company than we are and
it has a much stronger record of acquiring group business, such as employer pension plans, than we
do. A lot of its value is in expected future contribution, rather than money that it already has in the
bank.
I attach the recent embedded value report of AL (Exhibit 2). This doesn't come with an
assurance opinion. Instead, it's prepared by AL's internal actuaries and approved by AL's
directors.
If this proposal gets past the first feasibility study, PA will most probably then commission a due
diligence investigation.

To help me draft our report to PA's board, please write me a note that answers these questions:
(a) From your analysis of the embedded value report, what matters of interest or concern do
you have that could affect our position as acquirer?
(b) What investigations do you think we would need to undertake before we could rely on the
work of AL's in-house actuaries?
(c) What do you think are the additional specific risks that we are taking by buying a controlling
interest in AL? Don't consider 'generic' issues such as cultural fit, fit with our overall business
strategy; I've already done some work on that.
(d) In respect to the due diligence investigation that we expect to commission:
 other than any matters you've already raised above, what specific areas of concern do
you think we should direct the external due diligence team to consider?
 what work would you expect the due diligence team to do in order to address the
areas of concern that we have?
Exhibit 2
Extract from unaudited embedded value report for Allerton Life

for the year ended 31 March 20X6
Required Free
1 2
capital surplus Equity VIF Total
Embedded value earnings for the year £'000 £'000 £'000 £'000 £'000
New business value 392 (1,232) (840) 1,569 729
Expected contribution at risk-free rate 2 89 91 145 236
Expected contribution in excess of
risk-free rate 4 197 201 201 402
Expected transfer to shareholders' net
assets (388) 1,342 954 (954) 0
Operating experience variances 23 (17) 6 30 36
Operating assumption changes 12 278 290 (431) (141)
Other operating variances 122 (199) (77) 98 21
Embedded value operating earnings 167 458 625 658 1,283
Economic variances 78 302 380 (46) 334
Other non-operating variances 84 (154) (70) 175 105
Embedded value earnings 329 606 935 787 1,722
Opening MCEV 3,834 1,432 5,266 8,320 13,586

Embedded value earnings 329 606 935 787 1,722
Dividends paid in the year 0 (620) (620) 0 (620)
Capital introduced in the
year 0 200 200 0 200
Foreign currency translation
effects (310) (240) (550) (644) (1,194)
Other movements 12 14 26 24 50
Closing embedded value 3,865 1,392 5,257 8,487 13,744
Notes
1 Equity is defined as shareholders' funds in the statement of financial position, including
non-controlling interests.
2 Value of in-force business.

12 Longrose
Today's date is 6 July 20X5.
You are Beatrice Harken. You work for Longrose LLP as an audit senior in its specialist insurance
audit group. One of your clients, Shorthouse Assurance Ltd, is looking to complete the audit of
the Shorthouse group financial statements for the year ended 30 June 20X5 audit as soon as
possible. There are a few main remaining issues regarding the valuation of goodwill acquired on
a business acquisition just over two years ago. The manager on the assignment, Roger
Cavanagh, has started to perform some final analytical procedures.
Shorthouse acquired another UK Insurance company Sleepside Insurance Services Ltd on
1 May 20X3 recognising a goodwill asset arising on the acquisition of £3,250,000. No
impairment loss was recognised on this asset in the financial statements for the year ended
30 June 20X4. However audit planning for the year ended 30 June 20X5 revealed that the
trading performance of Sleepside had declined from the results of the previous year.
You are provided with the draft financial statements of Sleepside (Exhibit 1). Shorthouse
prepares its financial statements under IFRS 4 and does not plan to adopt IFRS 17 early.
Requirements
12.1 Using the information in Exhibit 1, comment on the performance of Sleepside over the
period from 1 July 20X3 to 30 June 20X5. Use qualitative and quantitative analysis as
appropriate.
12.2 Explain what judgements are required and what further information would be useful to be
able to estimate whether an impairment of the goodwill asset is required.
12.3 Reply to the note from Roger (Exhibit 2).
Total: 30 marks

Exhibit 1
Sleepside Financial Statement extracts

Statement of profit or loss and
other comprehensive income for the year ended 30 June 20X5 20X4
£'000 £'000
Income
Gross written premiums 10,472 11,517
Premiums ceded to reinsurers (635) (578)
Premiums written, net of reinsurance 9,837 10,939
Net change in provision for unearned premiums (165) (82)
Net earned premiums 9,672 10,857
Fees and commission income 625 511
Investment income 2,845 2,071
Share of profit/(loss) of joint venture 145 (43)
Profit/(loss) on disposal of property, plant and equipment (133) 195
13,154 13,591
Expenses
Claims and benefits paid, net of reinsurance 9,632 9,256
Change in insurance liabilities, net of reinsurance 424 747
Change in investment contract provisions 37 (97)
Fees and commissions expense 1,499 1,550
Other expenses 887 1,129
Finance costs 302 276
Total expenses (12,791) (12,861)
Profit before tax 363 730
Tax on continuing activities (70) (79)
Profit after tax 293 651
Loss from discontinued activities – (181)
Profit for the year 293 470
Other comprehensive income, net of tax

Exchange differences on cash flow hedges 237 (8)
Share of joint venture’s other comprehensive income 32 (46)
Other comprehensive income for the year 269 (42)
Total comprehensive income for the year 562 428

Statement of financial position at 30 June 20X5 20X4
£'000 £'000
Assets
Acquired value of in-force life policies 1,517 1,612
Interest in joint venture 1,038 974
Property, plant and equipment 225 176
Investment property 4,320 4,023
Financial asset investments 86,271 84,305
Reinsurance assets 2,270 2,458
Tax assets 72 131
Receivables 2,643 2,744
Deferred acquisition costs 1,909 2,227
Prepayments and accrued income 1,281 1,118
Cash and cash equivalents 7,439 8,055
Non-current assets held for sale – 147
Total assets 108,985 107,970
Equity
Ordinary shares 320 320
Share premium account 1,536 1,536
Revaluation surplus 372 442
Other equity reserves 365 356
Retained earnings 3,384 3,091
Total equity 5,977 5,745
Liabilities
Gross insurance liabilities 53,201 51,343
Gross liabilities under investment products 37,025 38,646
Unearned premium reserve 3,801 3,509
Provisions 274 343
Total tax liability 521 485
Borrowings 3,101 2,914
Financial liabilities 4,120 3,882
Other liabilities 965 1,103
Total liabilities 103,008 102,225
Total equity and liabilities 108,985 107,970
Exhibit 2
Note from Roger Cavanagh, audit engagement manager

Beatrice,
I know that we still have some audit work to do on goodwill, but I've been doing final analytical
procedures on the near-final financial statements of Sleepside (Exhibit 1).
Most of the figures make sense to me, but some figures just look wrong.
I'm worried about how the movement on unearned premium reserve (UPR) over the year has
produced a debit to profit or loss, when premiums have gone down. I'd expect the total value
for UPR to go down if gross written premiums goes down.
Deferred acquisition costs look wrong to me.

What I want you to do now is:
1 suggest reasons that might cause the change in UPR in the draft financial statements
(Exhibit 1); and
2 explain the movement you would expect in deferred acquisition costs (DAC) if all of the
other figures are correct. Explain whether DAC in the statement of financial position has
changed as you would have expected.
13 Solano Insurance Company Ltd

Solano Insurance Company Ltd (Solano) is a large international life, pension and general
insurance company based in the UK. You are Gareth Brown, a trainee ICAEW Chartered
Accountant working in Solano's strategic planning department.
Solano plans to expand through acquiring a smaller insurance company and has identified a
potential acquisition target, Minor Ltd (Minor). Minor is a small insurance company also based in
the UK.
Your line manager has sent you an email asking for your assistance in preparing for a meeting
with Solano's management (Exhibit 1).
Requirements
13.1 Respond to John's email (Exhibit 1).
13.2 Identify and explain any ethical issues arising from Exhibit 4. Outline any actions you should
take.
13.3 In addition to due diligence, what other methods might an acquirer use to limit their
exposure to policies for which a target insurer was on risk at the date of an acquisition?
Total: 34 marks
Exhibit 1
Email from John Jones

To: Gareth Brown
From: John Jones
Subject: Confidential
Date: 1 February 20X7
For the intended recipient and for internal use only
I have been asked by the division's managing director (MD) to treat the following with utmost
confidentiality. Solano has identified a potential acquisition target, Minor, for which we will be
preparing preliminary analysis, for the MD to use in a meeting with Solano's board next week.
I have attached Minor's latest financial statements (Exhibit 2).
I would like you to complete the following:
 Identify and explain likely due diligence procedures that we are likely to perform on Minor's
statement of profit or loss and statement of financial position (Exhibit 2). Identify and justify
any additional information we require at this stage.
 Explain the financial reporting implications of items discussed in Exhibit 3.
 Outline any regulatory issues and other practical concerns that could arise from the
acquisition.

Exhibit 2
Extract from Minor's draft financial statements

Assets 31.12.20X5 31.12.20X4 Change
£m £m %
Cash and cash equivalents 11,577 10,813 7.06
Financial assets at fair value through profit or
loss 5,669 4,583 23.71
Investments 397,405 379,427 4.74
Loans and advances to banks and customers 91,751 91,319 0.47
Financial assets for unit-linked contracts 82,581 73,760 11.96
Reinsurance assets 11,578 10,598 9.24
Deferred acquisition costs 19,683 17,364 13.35
Tax assets 1,087 816 33.27
Non-current assets and assets of disposal
groups classified as held for sale 84 183 (53.62)
Intangible assets 10,486 10,729 (2.27)
Other assets 30,274 28,922 4.67
Total assets 662,175 628,514 5.36
Liabilities and equity 31.12.20X5 31.12.20X4 Change

£m £m %
Financial liabilities at fair value through
profit or loss 7,181 6,627 8.37
Liabilities to banks and customers 19,914 17,952 10.93
Unearned premiums 16,115 15,444 4.34
Reserves loss adjustment expenses 56,162 53,811 4.37
Reserves for insurance and investment
contracts 379,253 361,401 4.94
Financial liabilities for unit-linked contracts 82,581 73,760 11.96
Tax liabilities 3,122 3,847 (18.84)
Liabilities of disposal groups classified for sale 15 79 (82.35)
Subordinated debt 16,100 15,790 1.96
Other liabilities 30,175 30,115 0.20
Total liabilities 610,618 578,826 5.49
Shareholders' equity 49,252 47,383 3.95
Non-controlling interests 2,305 2,305 0.00
Total equity 51,557 49,688 3.76
Total liabilities and equity 662,175 628,514 5.36

Exhibit 3
Information about Minor

Other assets in the year ended 31 December 20X4 represents premiums due from policy
holders on deferred payment agreement that have not been received of £20 million originally
recognised before 1 January 20X4. This occurred as a result of the premiums not being 'due'
under the premium payment method, but to be consistent with the reserve calculation, they will
become payable before the next reporting date.
Financial assets at fair value through profit or loss relates to non-trading derivatives held for risk
management purposes that do not form part of qualifying hedge relationships and financial
assets and liabilities designated at fair value through profit or loss. It includes all realised and
unrealised fair value changes, interest, and foreign exchange differences.
Other assets include impairment charges that are calculated by assessing loans made to
investment banks depending on the characteristics of the portfolio. Loans are categorised into
appropriate risk grades and are placed on a watch list if there are indications of impairment.
Once an impairment event occurs, for example default of amounts due, the loan is classified as
impaired and an impairment allowance is created to reduce to the carrying amount of the loan.
Provisions relate to pending mis-selling of pensions redress which has been increased during
the current year due to a greater than expected number of claims being received by Minor.
Exhibit 4
Personal circumstances
You have been working at Solano as a trainee ICAEW Chartered Accountant for two years since
joining as a graduate. Your partner Marty joined Parker and Richards Chartered Accountants
practice at the same time in the compliance audit unit. Marty has been assigned to the audit of
Minor, and in the course of the evening has been discussing it with you.
Marty advises you that there is concern over Minor's ability to remain a 'going concern' due to
unidentified impairments which will reduce the draft profit figure quite considerably.
Having just received the email from John Jones you are left with a dilemma.
14 Premiership plc
Andy Charlton works for Gandalf McMahon (GM). Andy is a newly qualified ICAEW Chartered
Accountant who is the lead auditor in charge of Premiership plc (Premiership), a UK-based
insurance company that specialises in motor and household insurance. Premiership's marketing
strategy is to promote its products to people in lower income groups, who are very sensitive to
premium pricing.
Premiership is solvent, though it does not maintain much of a safety buffer above the solvency
minima that are acceptable to the Prudential Regulation Authority (PRA).
During the audit of the financial statements for the year ended 31 March 20X6, Andy noted that
the premiums charged by Premiership are lower than the industry average. During the audit
work on the year-end financial statements of Premiership, Andy noted that the claims
department declined some 60% of policy holders' claims, and also applied the condition of
'average payouts' (Exhibit 3) to many more. Andy particularly noted the claims in Exhibit 1.
Andy was concerned that the company may be turning down an excessive proportion of claims
made by policy holders.
Andy arranged a meeting with Premiership's finance director to discuss his findings. The FD
dismissed Andy's concerns as unfounded. In her view, Premiership simply had a much higher
rate of false claims than many other insurers because Premiership's policy holders were

generally more in need of money than most other insurers, so had a greater incentive to make
fraudulent claims. She provided Andy with a summary of claims received and rejected (Exhibit 2).
As a result of the declined claims and complaints record, Andy feels that the process of
arranging the policies should be looked at more closely.
He discovers that the process used to establish the true value of an item, for example the
rebuilding cost of the house, is to simply ask the customer for their opinion of the value, and the
use of pre-filled boxes for existing customers is also widely accepted. For example, a house
value was increased on an application form as a result of the indexation amount based on the
national house price index, regardless of the fact that an extension had been added to the
house during the course of the year. Andy also found vague clauses in the application forms,
and specific questions like "do you smoke?", rather than "when did you last use tobacco
products?".
As an example, a policy may state someone has to take 'a high degree of care' to protect their
belongings, but what this means is open to interpretation.
There were no records found of Premiership having provided any guidance to their customers
of how the rebuild cost should be calculated or what should be included, for example cost of
site clearance and fees from architects, surveyors, lawyers, etc.
Requirements
14.1 Based on the commentary in Exhibit 1, comment on the defects in the company's strategy
of claims payments, and how it complies with the relevant UK legislation.
14.2 Evaluate and describe the likely impact of Premiership's claims handling on:
(a) The financial statements, and
(b) The job security of the directors and management of Premiership plc
14.3 Describe the powers of the Financial Ombudsman Service. Outline the actions that the
Ombudsman may be likely to take with Premiership, if it receives too high a number of
complaints about Premiership.
14.4 Assess whether GM has a duty to report its concerns to the Financial Conduct Authority
(FCA) and/or the PRA.
Total: 30 marks
Exhibit 1
Extract from audit file of claims selected for audit testing of rejected claims
Claim 1
An elderly gentleman was refused a payout from his home insurance policy after he was
burgled. He was asleep in his house when the burglars broke in. After being attacked and
rendered unconscious, the thieves stole several items, including the gentleman's car keys.
They then used his front door keys to unlock the door and let themselves out.
The insurer rejected the claim because the small print in the policy read that a 'forcible entrance
and exit' had to have occurred. The elderly gentleman stated that he was unaware of this
statement.
Claim 2
The policy holder stopped her car on her driveway and got out, leaving the engine running and
the door open, in order to lift up her garage door. However, before doing so, she unloaded
some shopping into the unlocked porch attached to the garage. As she did this she heard a
noise and turned round to see someone jump into her car and drive away at high speed. She
was very close to the car but could do nothing to prevent it from being stolen.
The insurer declined the claim on the basis of exclusion for "losses arising from the use of keys
which had been left in or around the vehicle".

Claim 3
The policy holder applied for household contents insurance. His local independent financial
adviser (IFA) completed a proposal form on his behalf, which he signed. One of the questions
asked was:
"Have you or any member of your household … had any property or possessions stolen, lost or
damaged or had any claims made against you, in the last three years (whether insured or not)?"
The policy holder remembered telling the IFA of an attempted break in which occurred some
months previously.
The IFA had advised him that this incident was not a burglary, because it was only an attempted
break in. The IFA therefore told the policy holder that he did not need to mention the attempted
burglary on the application form. There was no entry into the house or anything stolen.
After a second successful attempt to burgle his property, the insurer appointed loss adjusters to
investigate both 'burglaries'. The insurer refused to pay either claim, and voided the policy from
its start date because the policy holder had not provided all relevant information to enable
Premiership plc to properly assess risk.
Exhibit 2
Premiership claims data, supplied from Premiership's management information system in the
12 months ended 31 March 20X6
Number of Fraudulent
claims 'Average claims
Type of policy received Claims paid clause' claims detected
Household 58,437 42,074 30,231 3,421

Motor 60,526 55,683 2,894 1,139
Travel 45,219 37,531 884 2,282
Exhibit 3
Explanation of 'average clause' claims

Prepared by Premiership's head of claims processing
Average clause claims arise where a policy holder has under-insured the property. This results in
premiums being lower, but subsequent claims must be scaled down.
For example, a policy holder has stated on the policy proposal that the rebuilding cost of their
house is £200,000. The rebuilding cost is actually £300,000. This policy holder has bought a
policy for only two thirds of the actual value, presumably with a lower premium as a result. Any
future claims made are subject to two thirds of the value ie, where a claim is made for £60,000
on the above, then only £40,000 would be paid out under the 'average payout' clause.

15 Tradesman's Insurance
You are Janine Miller, a recently qualified ICAEW Chartered Accountant who works for KSTM
Chartered Accountants. KSTM is the recently appointed external auditor of Tradesman's
Insurance plc (TI). You are conducting the final audit of the financial statements for the year
ended 30 September 20X6. TI prepares its financial statements under IFRS 4.
TI is a UK-based insurer. It has existed for just over a century, having been established as a mutual
insurer in the North of England in the early days of the 20th century. It remained a mutual insurer
until 20X4, when it demutualised and listed on the London Stock Exchange. The policy holders at
the time became shareholders. The majority sold their shares quickly after trading in the shares
opened. The Prudential Regulation Authority (PRA) has categorised it as a 'category 2' firm given
its significance to the UK market.
You and the engagement partner have both become concerned that reserving at TI is
haphazard. Although an s.166 review (Exhibit 1) undertaken in 20X4 in response to concerns
about possible under-reserving had stated that reserves were adequate, you are both somewhat
concerned that this may now be more by good luck than design. The engagement partner is
becoming concerned that "the more I look under the bonnet at TI, the more I think that this is a
car crash waiting to happen. The board are nice guys who mostly don't know what they're doing
and the actuary looks to be completely captured by them to me. I'm also worried about the
amount of notes and coins that seems to be paid into TI (Exhibit 2). It might be because they're
approaching retirement and many of them are paid cash in hand. I also know that TI's history is
in industrial life assurance, but it just seems so odd to still do business that way. I also worry a lot
that claims like the Tindell claim (Exhibit 4) are lurking in their policies somewhere but
everybody seems determined to see that case as a one-off."
Requirements
15.1 To what extent should KSTM place reliance on the conclusions of Goldings that reserving at
TI (Exhibit 1) was adequate?
15.2 Comment on the acceptability of the deliberate over-reserving to set aside funds for cyclical
weather catastrophes from the point of view of:
(a) The IFRS financial statements
(b) Solvency calculations under Solvency II
15.3 In respect of TI's proposal to use its own model for determining capital requirements, rather
than using the standard formula of Solvency II:
(a) Assess whether the PRA is likely to accept TI's use of its own model; and
(b) Assess whether KSTM would be able to provide consultancy advice to help TI develop
this model.
15.4 Comment on the fitness for purpose of the corporate governance arrangements at TI
(Exhibit 3), paying particular attention to remuneration arrangements in accordance with
Solvency II.
15.5 In respect of the larger-than-expected claim by Mark Tindell (Exhibit 4), explain the features
of this claim that probably caused it to be larger than initially expected.
15.6 Describe an appropriate response that the external auditor should take and state to whom
concerns should be reported, and when and in what form, if the engagement partner has
reason to believe:
(a) The cash deposits (Exhibit 2) contain a non-trivial amount of money laundering;
(b) The board does not have sufficient competence to run an insurance company of this
size (Exhibit 3);

(c) TI's in-house actuary's seat on the board and remuneration package are creating a
conflict of interests in the performance of their job that is not being adequately
managed by TM (Exhibit 3); and
(d) TI may be insufficiently reserved to withstand a poor underwriting year.
Total: 42 marks
Exhibit 1
Extract from client acceptance checklist on the audit file

Skilled person review
TI had been subject to a review by a 'skilled person' under s.166 FSMA 2000. The skilled person
was a partner in Goldings, another national firm of chartered accountants.
The review had been commissioned because the Prudential Regulation Authority (PRA) had
become concerned that reserves on employers' liability perils in TI's PRA return for the year
ended 30 September 20X4 were reserved at a lower percentage of the associated premium
income than was typical for those PRA classes of business.
The review used Goldings' in-house actuarial team, who looked at the lines of business and
concluded that TI was writing simpler risks than was typical for that PRA return class of business
and that TI's actual history of settled claims to date supported the reserves, although Goldings
noted that reserves were on the lower end of the range of estimates that it would consider
appropriate.
Goldings' report to the PRA had concluded "based on the evidence obtained during our review,
nothing has come to our attention to suggest that the reserves of Tradesman's Mutual Insurance
are not adequate for the purpose of paying all claims incurred by the date of this report".
Worst case reserves
TI has a concentration of risks in areas that are susceptible to flooding and other cyclical weather
catastrophe events. The long-standing policy of TI is to over-reserve in years where the winter
weather has been better than expected, in order to have money set aside to be able to pay
when cyclical adverse weather events happen. These are not shown separately in the statement
of financial position, but are instead included within ordinary insurance liabilities.
Solvency Capital Requirement
TI is aware of there being some uncertainty at the initial implementation of Solvency II. The
board is keen to use its in-house actuary to develop its own model for determining the Solvency
Capital Requirement under Solvency II rather than using the standard formula approach for
Solvency II. The company has indicated that it may wish KSTM to help in the development of this
model.
Exhibit 2
Audit file note on TI's business plan

Distribution routes
The company writes both general business, mostly in employers' liability, personal health and
income protection policies. 80% of premiums by value are collected by direct debit, though TI
still has some old-fashioned industrial life assurance and unit-linked savings policies, where
agents collect premiums and contributions in cash directly from policy holders. There is a
pattern of policy holders paying in much greater amounts in cash as they approach retirement,
which are often then withdrawn as a lump sum on retirement.

Exhibit 3
Extract from audit file work on corporate governance

The governance structures of TI still owe much to the company's roots as an industrial mutual
insurer. The board is still substantially unchanged from the last year of TI's operation as a
mutual, although executive remuneration is now much higher than it was then, with all directors
holding shares in TI and a bonus scheme that provides each director with a bonus equivalent to
their salary, multiplied by 10 times the % growth in premium income in the year. If a director has
a basic salary of £100,000 and growth in premium income is 4%, that director would receive a
bonus of £40,000.
The board comprises 10 directors, half of whom are non-executive. Four of the directors have
extensive backgrounds in insurance. The others were elected directly from the policy holder
body when TI was a mutual insurer. The others are drawn from the local community, including
three directors from trade unions associated with TI's business.
TI has an in-house actuary, who has been in that role for some years and who sits on the board
as 'director of actuarial services'.
Exhibit 4
Wheelans Builders claim

Summary of the claim provided by TI's in-house actuary
In 20X5, we finally saw settlement of a claim that was originally notified in 20W9. 17 years ago, TI
had underwritten an employer's liability policy for Wheelans Builders. This covered up to £5
million of claims for employer's liability in any one policy year, with a maximum claim on one
individual claim of £1 million.
Wheelans provided protective clothing to wear, including a face mask, which company policy
stated all employees must wear whenever they were working with plaster dust, fumes from
cleaning agents or whenever starting a renovation project, in case asbestos was discovered in
the building. Where asbestos was discovered, specialist clean-up teams were brought in to
remove the asbestos, even though this delayed work. Employees were paid modest bonuses for
timely completion of work.
The masks were informally referred to by the builders as 'pansy pads' and seldom worn, against
company policy to wear at all times.
Mark Tindell was a labourer who worked for Wheelans, doing various manual tasks. His work
involved exposing him to extensive plaster dust and chemical fumes. At the time, he was
23 years old.
Mark became seriously ill in 2008, which was eventually diagnosed as a chronic lung condition
that would prevent him from ever working again. Wheelans dismissed him from employment
with minimum statutory redundancy pay. Doctors were able to trace his condition to an unusual
susceptibility that he had to the plaster dust that he was exposed to.
Mark engaged a personal injury law firm to sue Wheelans. For years, Wheelans refused to
acknowledge any fault and refused to make any payment to him. In the court case, it became
known that Wheelans' management had determined that although Mark's condition could
probably have been prevented if the protective wear policy had been enforced, they did not
implement changes to require other staff to wear the protective equipment, as it was suspected
this would slow down productivity and make Wheelans less competitive.
The initial notified value of the claim was £20,000. This eventually settled in the High Court with
an order to pay for Mark's medical care and pay an annual sum of £2,000 each month for the
rest of Mark's life.

16 ZazuCover Insurance plc
You are Bert Ernst, an ICAEW Chartered Accountant who works in the financial reporting
department of ZazuCover Insurance plc (ZZC). ZZC is a UK-based insurer, which writes only
general insurance business. ZZC prepares its financial statements under IFRS 4 and does not
intend to adopt IFRS 17 early.
You have been asked to assist in the preparation of the company’s financial statements for the
year ended 30 June 20X6. You have been asked to present your figures to the nearest
£1 million.
You have been provided with a trial balance (Exhibit 1), together with some year-end
adjustments (Exhibit 2) and a note from Stella Turnbull, ZZC’s financial controller (Exhibit 3).
Requirements
16.1 Prepare journals, including narratives, for the adjustments in Exhibit 2.
16.2 Prepare for ZZC:
(a) A statement of profit or loss and other comprehensive income for the year ended
30 June 20X6; and
(b) A statement of financial position at that date.
16.3 Reply to the questions asked of you by Stella Turnbull in Exhibit 3.
Total: 40 marks
Exhibit 1
Summary trial balance at 30 June 20X6 DR CR

£m £m
Available-for-sale financial assets (AFSFA) 534
Cash 408
Claims handling and administration costs 78
Claims paid: previous underwriting years 389
Claims paid: this underwriting year 401
Commission expenses 134
Deferred acquisition costs @ 1.7.X5 78
Derivative assets 44
Derivative liabilities 22
Equity @ 1.7.X5 1,202
Finance costs 52
Financial assets @ FVPL 1,320
Gross written premiums 1,384
Insurance liabilities 1,652
Insurance receivables (deferred premiums) 394
Interest bearing borrowings 40
Investment income 76
Investment properties 132

Summary trial balance at 30 June 20X6 DR CR
£m £m
Movement in insurance liabilities (P/L) 141
Movement in UPR –
OCI: Cash flow hedge result 40
OCI: Gains on AFSFA 22
OCI: Temporary loss in value 26
Other operating income 38
Property, plant & equipment 78
Reinsurance assets 564
Reinsurance ceded 189
Reinsurance claim income 88
Tax expense 24
Tax liability 21
Unearned premium reserve @ 1.7.X5 481
Items to be recognised in other comprehensive income are stated net of taxation.
Exhibit 2
Year-end adjustments
1 Deferred acquisition costs are to be increased by £12 million.
2 Gross written premiums includes £54 million, which represents increases in total premiums
payable by policyholders because they chose to pay their premiums over the course of the
policy on monthly payment terms.
3 Insurance liabilities are based on the figure advised by the actuary and does not currently
include expected claims handling costs. In today's money terms, claims handling costs are
expected to be £25 million, £18 million and £10 million in the upcoming years 30 June
20X7, 20X8 and 20X9 respectively. These are to be discounted at a rate of 4%. Assume all
payments occur at the end of each year.
4 The auditors have stated that they are not satisfied that the cash flow hedge in the trial
balance was properly documented at its inception. The company is therefore not able to
use hedge accounting for this transaction.
5 The company uses settlement date accounting for its financial assets under IAS 39. At
30 June 20X6, the company had committed to buying investments that would be held at fair
value through profit or loss when the transaction was settled. Between entering into the
transaction to purchase these assets and the close of business at the year end, the fair value
of these shares had increased by £1 million.
6 The financial controller qualified under UK GAAP some years ago. She has recorded a drop
in value of investment properties in other comprehensive income as a temporary drop in
value and has chosen to report this in other comprehensive income. ZZC uses the fair value
model for investment properties in accordance with IAS 40.
7 Unearned premiums at 30 June 20X6 have been correctly calculated as £470 million.

Exhibit 3
Note from Stella Turnbull

Hi Bert
I need your advice on the whole issue of discounting liabilities. Back in my day when I was doing
my accountancy degree, we didn't discount anything in the financial statements to present
value. Nowadays it seems that we discount just about everything. I need to draw on your more
recent studies and knowledge to get this right!
The actuaries used a discount rate of 4% to discount liabilities. I've suggested that we use this
rate when working out how much we need to top up the insurance liabilities for claims
management costs (Exhibit 2). I've chosen 4% because it seemed the easiest to justify, but I'm
not sure that I really fully understand this.
Can you please write me a quick briefing note that answers these questions:
1 What do we need to do with our estimated figures to make sure that the assumptions in
those figures are consistent with the choice of 4% as a discount rate?
2 Do we actually need to discount liabilities at all? We always have done in the past, but I was
reading IFRS 4 at home last night and it looks to me that we could save ourselves a lot of
time and effort by presenting our figures not at present values at all. Is that right?
3 I've reported the loss in investment properties in OCI because the management committee
believes that this was a temporary diminution in value. The value did indeed recover shortly
after the year-end. To me, this was an unrealised loss and so it should be reported in equity.
Is that still the correct treatment?
4 I suggest that we show our insurance liabilities net of expected reinsurance recoveries. It
seems needlessly cumbersome to me to show half of the story in non-current assets and the
other half of the story in non-current liabilities. What do you think?
Thanks
Stella
17 Nearly Human Pet Insurance

You are John Morris (JM). You are a recently qualified ICAEW Chartered Accountant. You work
for Gerard Mercer (GM), a firm of ICAEW Chartered Accountants. You have recently been
appointed as the assistant manager on the external audit of Nearly Human Pet Insurance plc
(NHPI).
Background information on NHPI
As the name implies, NHPI writes specialist pet insurance. It has no other lines of business. NHPI
was set up by Greg Tapper. For 18 years, Greg had worked in human health insurance and life
insurance. He set up NHPI six years ago. In the last six years, NHPI had experienced a rapid rate
of growth, with annual growth on average of 23%.
NHPI's premiums are typically 30% higher than the market leader. NHPI obtains market
advantage principally by doing the following:
 Offering pet insurance plans that guarantee a maximum annual premium increase of
inflation plus 4%, to a maximum of five years.
 Underwriting risks for a wider range of pets than most insurers. Many pet insurers insure
only cats and dogs. NHPI also offers insurance for reptiles, birds and other more exotic pets.

 Providing a more personal service. For five-year policies, the insurance company also
provides a free pet funeral service. It provides cash of £500 with which policyholders make
their own pet funeral arrangements. If the pet dies within five years, the amount paid is pro
rated downwards, to a minimum value of £250. Where a pet survives for more than five
years on the same policy and that policy is not cancelled, the £500 is returned to the
policyholder to cover the eventual costs of the pet funeral.
 NHPI has always marketed itself as health insurance for the furry members of the family,
comparing the level of its care to private health insurance for humans.
 Selling policies by direct sales, via price comparison websites and also via vets, who are
paid an up-front commission of 12% of the total premium for the term of the policy.
 Providing 'easy payment' terms for premiums, where policyholders are able to pay in
monthly instalments. This option is more expensive than up front premium payments. Easy
payment terms are typically 18% pa more expensive for a year's cover than up front
payments.
 NHPI prepares its financial statements in accordance with IFRS 4. It does not intend to adopt
IFRS 17 early.
You have been provided with the following:
 Your own notes of an initial planning meeting with Greg Tapper (Exhibit 1)
 Notes on underwriting processes, prepared by one of your colleagues (Exhibit 2)
 An extract of accounting policies note in the financial statements (Exhibit 3)
 Notes on claims management processes, prepared by one of your colleagues (Exhibit 4)
Requirements
17.1 Assess whether the quoted accounting policies (Exhibit 2) comply with IFRS.
17.2 Identify and explain the weaknesses in the company's underwriting process, including any
potential effect on the company's financial statements. Comment on the legal and ethical
position of the pet funeral policy benefit.
17.3 Identify and explain the weaknesses in the company's claims handling process, including
any potential effect on the company's financial statements.
17.4 Explain the work that the external auditor would expect to perform on the work and
conclusions of the external actuary before being able to place reliance on their work for the
financial statements.
Total: 40 marks

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The Institute of Chartered Accountants in England and Wales

For exams in 2020

ii Business Planning: Insurance ICAEW 2020

ICAEW 2020 Contents iii

June 2016 examination

September 2016 examination

December 2016 examination

June 2017 examination

September 2017 examination

December 2017 examination

iv Business Planning: Insurance: Question Bank ICAEW 2020

June 2018 examination

September 2018 examination

December 2018 examination

June 2019 examination

September 2019 examination

ICAEW 2020 Contents v

Syllabus learning Study Manual

Life insurance risks 1h, 2h 8, 9, 19, 23, 26, 48, 2

vi Business Planning: Insurance: Question Bank ICAEW 2020

IAS 39/IFRS 9 – 3e 2, 34, 49, 52, 53, 56, 7

ICAEW 2020 Question Bank topic finder vii

3 questions 100 marks

viii Business Planning: Insurance: Question Bank ICAEW 2020

1 Elgins General plc

ICAEW 2020 Question Bank 3

Elgins General plc

Profit before taxation 2,490 2,560

Elgins General plc

4 Business Planning: Insurance: Question Bank ICAEW 2020

ICAEW 2020 Question Bank 5

Extracts from draft financial statements at 31 December 20X5

6 Business Planning: Insurance: Question Bank ICAEW 2020

Extract from accounting policies from the draft financial statements

Extract from accounting policies from the draft financial statements

ICAEW 2020 Question Bank 7

Extract from accounting policies from the draft financial statements

8 Business Planning: Insurance: Question Bank ICAEW 2020

Email from Germaine Holden

ICAEW 2020 Question Bank 9

10 Business Planning: Insurance: Question Bank ICAEW 2020

ICAEW 2020 Question Bank 11

12 Business Planning: Insurance: Question Bank ICAEW 2020

1 Household Accidental Damage 0 2,000 2,000

2 Household Accidental Damage 650 0 650

3 Household Accidental Damage 2,500 5,750 8,250

4 Household Theft 0 4,000 4,000

5 Household Accidental Damage 1,800 0 1,800

6 Household Accidental Damage 3,200 0 3,200

7 Household Accidental Damage 3,700 4,200 7,900

8 Household Accidental Damage 0 4,000 4,000

9 Household Theft 0 5,000 5,000

10 Household Accidental Damage 1,800 0 1,800

Note from Maria Swanson – Senior Claims Handler

ICAEW 2020 Question Bank 13

Note to the senior management team of FL from Holger Ottmann, CEO

14 Business Planning: Insurance: Question Bank ICAEW 2020

Email to Felix McAndrew from James Canterbury, Head of Investor Relations

Simple unit-linked savings Annuities

ICAEW 2020 Question Bank 15

* Owners' equity means shareholders' equity.

Email to Felix McAndrew from Bob Dawson, financial controller of FL

16 Business Planning: Insurance: Question Bank ICAEW 2020