R05 CIC premiums and underwriting: free practice questions

1. Question 1 of 5

   Critical illness underwriting is closest in approach to underwriting for which type of cover?

   Option A: Investment bondsOption B: Pure life assuranceOption C: Income protectionOption D: Motor insurance

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   The answer is C: Income protection

   Critical illness underwriting is based on morbidity risks for the illnesses covered, so it is closer to income protection than to pure life underwriting. Medical and family history are important.

   Why the other options are wrong

   A

   Investment bonds carry only nominal life cover and minimal underwriting.

   B

   Pure life underwriting focuses on mortality; critical illness is about morbidity.

   D

   Motor insurance is general insurance with very different risk factors.

2. Question 2 of 5

   Why must actuaries pricing critical illness cover consider developments in medical diagnostic techniques?

   Option A: Insurers must pay for diagnostic tests for every policyholderOption B: New techniques reduce the number of diagnoses made each yearOption C: Diagnostic advances automatically lower all premiums over timeOption D: Earlier detection can lead to more claims that meet the definitions

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   The answer is D: Earlier detection can lead to more claims that meet the definitions

   Advances allow many illnesses to be detected earlier, possibly before they become critical, which can increase claims. This has led to new definitions for new policies.

   Why the other options are wrong

   A

   Insurers aren't required to pay for diagnostic tests for all policyholders.

   B

   Better diagnosis tends to find more illness, and earlier, not less.

   C

   Diagnostic advances don't lower premiums; they can increase claims.

3. Question 3 of 5

   How do guaranteed critical illness premiums typically compare with reviewable premiums at the outset?

   Option A: They can be as much as twice the costOption B: They are always 10% higherOption C: They are identical until the first reviewOption D: They are usually slightly cheaper

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   The answer is A: They can be as much as twice the cost

   Guaranteed premiums are much higher, often up to twice the starting cost of reviewable premiums, but give certainty that they will not rise.

   Why the other options are wrong

   B

   There's no fixed 10% difference; guaranteed can cost up to twice as much.

   C

   They differ from the outset, not only at the first review.

   D

   Guaranteed premiums are usually much dearer at the start, not cheaper.

4. Question 4 of 5

   What trend has there been in recent years in the premium basis for critical illness cover?

   Option A: A shift to reviewable premiums as guaranteed rates have become dearerOption B: A move towards single premium policies for older clientsOption C: A move towards guaranteed premiums only, across all of the providersOption D: The abolition of reviewable premiums by the FCA

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   The answer is A: A shift to reviewable premiums as guaranteed rates have become dearer

   As the cost of guaranteed premiums has risen, there has been a significant trend towards reviewable critical illness products.

   Why the other options are wrong

   B

   There's no trend towards single premium critical illness cover.

   C

   The trend is away from guaranteed-only cover.

   D

   The FCA hasn't abolished reviewable premiums.

5. Question 5 of 5

   In critical illness pricing, which element is the largest component of the premium?

   Option A: ExpensesOption B: Morbidity riskOption C: Investment returnsOption D: Profit margin

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   The answer is B: Morbidity risk

   Premiums are based mainly on morbidity statistics. Expenses are less important and the investment element is minimal.

   Why the other options are wrong

   A

   Expenses matter, but they're smaller than the morbidity cost.

   C

   The investment element in critical illness pricing is minimal.

   D

   Profit is a small margin, not the largest component.

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