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Free CII London Market Underwriting Principles (LM3) Practice Questions

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Sample Practice Questions

Try these 10 sample questions from the CII London Market Underwriting Principles (LM3) practice bank. Each includes the answer and explanation. Continue with the interactive practice above to review the full question set.

  1. 1Which description best explains the structure through which underwriting is carried out at Lloyd’s?

    1. A.Separate syndicates bring together members to accept insurance risks.Correct answer: A
    2. B.One insurance company writes every class through its own branches.
    3. C.A single broker accepts every risk on behalf of all its clients.
    4. D.The regulator pools policyholders' premiums to meet insured claims.

    Explanation: Lloyd’s explains: "A Lloyd’s syndicate is formed by one or more members joining together to provide capital and accept insurance risks." This describes a market of syndicates rather than one insurance company. Brokers distribute business and regulators supervise; neither replaces the underwriting syndicates.

    Reference: Lloyd’s — How the market works — Syndicates – writing the insurance

  2. 2A policy is placed with a Lloyd’s syndicate. On the underwriting side, with whom is the insurance contract made?

    1. A.The broker that negotiated the placement.
    2. B.The Corporation of Lloyd’s as market operator.
    3. C.The members' agent that advised the capital providers.
    4. D.The underwriting members participating on the risk.Correct answer: D

    Explanation: Lloyd’s states: "As a result, the contract of insurance is with the relevant underwriting members participating on the risk." Identifying these members establishes the underwriting counterparties. The broker, Corporation and members’ agent have different roles and are not substituted for the underwriting members.

    Reference: Lloyd’s — Lloyd’s as a counterparty — Insurance policies at Lloyd’s, contracting parties

  3. 3How should a Lloyd’s syndicate’s annual business plan relate to its business strategy?

    1. A.It should align planned underwriting activity with the strategy.Correct answer: A
    2. B.It should replace the strategy with the largest available premium target.
    3. C.It should be prepared independently of the strategy and risk appetite.
    4. D.It should apply only to claims already settled in earlier years.

    Explanation: Principle 1 calls for syndicates to "Develop and execute annual business plans which align with their business strategy". The plan translates strategy into planned activity. Maximising premium independently of strategy, ignoring risk appetite or confining the plan to settled claims would not meet this relationship.

    Reference: Lloyd’s — Principle 1: Underwriting Profitability — Sub-principle 2, annual business plans

  4. 4Two equally sized portfolios are observed for the same length of time. One produces twice as many claims as the other. Which measure is directly higher for that portfolio?

    1. A.The frequency of claims during the period.Correct answer: A
    2. B.The severity of each individual claim.
    3. C.The average amount paid per claim.
    4. D.The maximum limit of every policy.

    Explanation: The glossary defines "Loss Frequency - incidence of claims on a policy during a premium period." With equal portfolio size and observation time, twice as many claims indicates higher frequency. Claim count alone establishes neither greater severity nor a higher average claim or policy limit.

    Reference: NAIC — Glossary of Insurance Terms — Loss Frequency

  5. 5What distinguishes a subscription placement from a policy written entirely by a single insurer?

    1. A.Several insurers each accept a proportion of the same cover.Correct answer: A
    2. B.Several brokers approach one insurer for alternative quotations.
    3. C.One direct insurer transfers part of its accepted risk to a reinsurer.
    4. D.One policyholder buys a separate complete policy from each insurer.

    Explanation: The source states: "A subscription policy is insurance taken out with multiple insurers within the Lloyd’s market, who have each subscribed (agreed) to provide a proportion of the cover.". Subscription shares the same direct cover among insurers. Competing quotations are not shared participation, reinsurance is a separate risk transfer, and several complete policies are not proportionate shares of one cover.

    Reference: Lloyd’s Claims Q&A for brokers — What’s a subscription policy?

  6. 6A business has an unusual liability exposure and wants access to underwriters with experience of that type of risk. What feature of the Lloyd’s market is most relevant to its choice?

    1. A.The replacement of individual risk pricing with one market tariff.
    2. B.The concentration of specialist underwriting expertise.Correct answer: B
    3. C.The provision of identical cover for every class of business.
    4. D.The removal of underwriting decisions from participating insurers.

    Explanation: The market description states: "The Lloyd’s market houses syndicates which offer an unrivalled concentration of specialist underwriting expertise and talent." Expertise relevant to the unusual exposure is therefore the stated attraction. A uniform tariff, identical coverage and removal of underwriting decisions do not describe that specialist model.

    Reference: Lloyd’s — How the market works — How the Lloyd’s market works, introductory description

  7. 7Why should a contract reviewer distinguish between the policyholder and the insured rather than assume they always describe exactly the same role?

    1. A.The policyholder executes the contract; the insured’s interest is covered.Correct answer: A
    2. B.The policyholder underwrites the risk; the insured’s interest is covered.
    3. C.The policyholder’s interest is covered; the insured necessarily arranges the contract.
    4. D.The policyholder places cover as broker; the insured underwrites the risk.

    Explanation: The glossary defines "Insured: the person whose interest is covered by the Insurance;" and "Policyholder: the person who executes the Insurance Contract and whose interest may be covered by the insurance;". Execution of the contract and the interest covered are different roles, although they can coincide. B assigns the insurer’s underwriting role to the policyholder; C makes arranging the contract a necessary insured role; D confuses the broker, insured and insurer.

    Reference: Lloyd’s Market Bulletin Y4431 — Appendix 1 Glossary — Appendix 1, Glossary: Insured and Policyholder

  8. 8What regular business-planning cycle is expressly identified in Lloyd’s Principle 1?

    1. A.A monthly business plan.
    2. B.An annual business plan.Correct answer: B
    3. C.A quarterly business plan.
    4. D.A five-year business plan.

    Explanation: Lloyd’s calls for syndicates to "Develop and execute annual business plans which align with their business strategy". Annual is the expressly stated regular business-plan cycle; monthly or quarterly reviews and longer-term strategy do not change that annual cycle.

    Reference: Lloyd’s — Principle 1: Underwriting Profitability — Sub-principle 2, planning frequency

  9. 9Five claim amounts are £1,000, £2,000, £2,000, £4,000 and £11,000. What is their arithmetic mean?

    1. A.£2,000.
    2. B.£4,000.Correct answer: B
    3. C.£2,250.
    4. D.£6,000.

    Explanation: NIST defines the mean as "the sum of the data points divided by the number of data points." Sum = £1,000 + £2,000 + £2,000 + £4,000 + £11,000 = £20,000. Mean = £20,000 / 5 = £4,000 exactly. £2,000 is the median and mode; £2,250 averages only the first four values; £6,000 is the midrange (£1,000 + £11,000)/2.

    Reference: NIST/SEMATECH e-Handbook — Measures of Location — Definition of Location, mean

  10. 10A Lloyd’s underwriting member has a 10% several share of an insured loss of £2 million. Another participating member fails to pay its own share. Ignoring any separate security arrangements, how much of the loss is the first member contractually liable for?

    1. A.£100,000
    2. B.£200,000Correct answer: B
    3. C.£1,000,000
    4. D.£2,000,000

    Explanation: The source states: "each member of a syndicate remains liable for its proportion of the risk on a several, rather than joint, basis.". Its liability is £2,000,000 × 10% = £200,000. £100,000 halves its share, £1 million assumes an equal two-party split, and £2 million incorrectly imposes liability for the whole loss.

    Reference: Lloyd’s as a counterparty — How is business written at Lloyd’s?

Exam Review

About CII London Market Underwriting Principles (LM3)

CII London Market Underwriting Principles (LM3) · GB

Key exam facts

Provider
Chartered Insurance Institute (CII): examining and awarding body; its Examinations Department produces the LM3 examination guide.
Format
On-screen multiple-choice examination at an exam centre or by remote invigilation. Each question has four options and one correct or best response; based on English law and practice unless otherwise stated.
Exam questions
Total questions: 75.
Time limit
2 hours of examination time under standard conditions; familiarisation/tutorial activities are separate from this answering time.
Passing score
Standard pass mark: 70%. CII adjusts MCQ marks where necessary for exam-version difficulty and reports adjusted marks relative to the standard; 70% is not a guarantee of an identical raw-score threshold on every paper.
Exam fee
GBP prices checked 30 October 2026: the LM3 page's default Enrolment plus package displays £280.52 for members and £382.28 for non-members. Includes digital study material/revision aids for 12 months and an assessment-entry voucher valid for 18 months. This is a combined package price, not a standalone examination or resit fee. Printed options incur postage and packaging; other purchase selections may differ.

Topics covered

  • Understand the framework within which business is conducted in the London Market (6.67%)

    • Explain the framework within which business is conducted in the London Market.
    • Characteristics of domestic and global insurance markets.
    • Influences on a client's choice between insuring in a domestic or global insurance market.
    • The origins of different sources of capital within the London Market.
    • The role of the Prudential Regulation Authority in the authorisation, regulation and supervision of insurers.
    • The role of the Financial Conduct Authority in the authorisation, regulation and supervision of insurance organisations.
    • The requirements of the Senior Managers & Certification Regime and the UK Corporate Governance Code.
    • The requirements of Lloyd's regulation which are covered by principles for doing business at Lloyd’s.
    • The main requirements of Solvency II regulation and how it relates to the insurance industry.
    • Explain the duties of the intermediary during the creation of a contract.
    • The roles of different types of intermediary operating in the London market.
    • The regulation of insurance intermediaries.
    • The role of an intermediary in the underwriting process.

  • Understand the role, purpose and implications of policy wording in practice (21.33%)

    • Explain the importance of knowing the identity of the contracting parties.
    • The importance of knowing the identity of the parties to an insurance policy.
    • Joint and composite insurance policies and when these are used.
    • How other parties can obtain access to an insurance policy.
    • Explain the importance of policy wording.
    • Contract certainty and its implications if not achieved.
    • The specific requirements that apply to consumer insurance policies.
    • Explain the various ways in which policy wordings can be constructed.
    • The importance of a clearly drafted policy wording.
    • The implications of ambiguity within a policy wording.
    • The relevance of who has drafted the policy wording.
    • How regulation may affect the drafting of policy wordings and the impact of using non-domestic policy wordings.
    • The advantages and disadvantages of the use of Market Reform Contracts and the requirements for their preparation.
    • Explain the importance of viewing the complete contract wording.
    • The benefits of wording libraries.
    • A side letter and under what circumstances it is used.
    • Common law rules of interpretation and their meaning.
    • The effect on policy wordings of wording specialists, insurer drafted wordings and specific client requirements.

  • Understand the role and importance of business planning and capital setting in the London Market (24%)

    • Explain the purpose and effect of the business planning process.
    • Business plans and how frequently they are produced.
    • Advantages and disadvantages to producing a business plan are.
    • The regulatory guidance, including Lloyd's, for the production of a business plan.
    • Explain the importance of ongoing monitoring and reporting on the business plan.
    • The data that a Lloyd's syndicate will provide to Lloyd's as part of its Syndicate Business Forecast.
    • The importance of internal reporting against the business plan for any insurer.
    • The reasons why Lloyd's reviews a syndicate's business plan and any action that may be taken in connection with potential issues.
    • The reports that Lloyd's syndicates are required to produce to enable monitoring against a business plan.
    • Explain how capital setting supports the writing of business.
    • What constitutes an insurer's insurance, credit and operational risk appetite and how it affects an insurer's capital requirements.
    • Enterprise risk management.
    • Explain the technical account.
    • Why an organisation produces financial accounts.
    • What a balance sheet is, what is stated in the document, and its purpose.
    • What an income statement is, what is stated in the document, and its purpose.
    • Cash flow statement and its purpose.
    • Why an organisation produces management accounts.
    • The meaning of assets and liabilities.
    • The meaning of profit and the return on capital employed.
    • The meaning of liquidity and gearing.
    • How a combined ratio is calculated and what it indicates about an insurer's financial position.

  • Understand the pricing of risk at an individual and at a portfolio level (16%)

    • Explain basic statistical theory.
    • The meaning of frequency and severity of risk.
    • The meaning of an arithmetic mean, mode and median, how they are calculated, and when they are used to analyse statistical data.
    • How probability is linked to return periods.
    • Explain the principles of constructing an insurance rate.
    • The difference between written, signed, gross, net, earned and unearned premium.
    • Risk premium and how it is calculated.
    • Positive and negative underwriting features and how they affect a premium rate.
    • The difference between paid claims, outstanding claims, incurred losses, incurred but not reported losses, and incurred but not enough reported losses.
    • Insurer's expenses and how they affect a premium rate.
    • How an insured's claims experience affects a premium rate.
    • The burning cost method of calculating an insurance premium and when is it used.
    • Claims triangulation and how it may affect a premium rate.
    • Explain the use of realistic disaster scenarios and catastrophe models.
    • What a realistic disaster scenario is considered to be and its importance.
    • What Lloyd's defines as being compulsory realistic disaster scenarios, specific scenarios and syndicate defined scenarios.
    • The purpose and value of catastrophe modelling.
    • When deterministic and probabilistic approaches to catastrophe modelling are used.

  • Understand the various methods of writing business and distribution (32%)

    • Explain the different types of placement.
    • How a subscription market operates.
    • Why insurers may front business along with the advantages and disadvantages.
    • Why insurance may be placed in a series of layers, and the advantages and disadvantages of this type of placement.
    • Explain the different methods of distribution.
    • The role of local branch and overseas offices.
    • What are affinity programmes and master policies, and the type of business for which they are likely to be used.
    • Explain the different types of delegated underwriting.
    • What a binding authority is and how it operates.
    • What a lineslip is and why it is used to place business.
    • What a consortium is and why it may be formed by insurers.
    • Explain the stakeholders’ roles and responsibilities.
    • The parties to a binding authority and why an insurer delegates authority to a coverholder.
    • The role of Managing General Agents in the operation of binding authorities.
    • The roles and responsibilities of consortium members.
    • The roles and responsibilities of lineslip participants.
    • When a conflict of interest may arise under a delegated underwriting authority.
    • Who is responsible for the issuance of policy documentation and achieving contract certainty under a delegated underwriting authority.
    • Explain the advantages and disadvantages of various methods of writing business for the stakeholders involved.
    • What the advantages and disadvantages are to insurers, coverholders and brokers of binding business by the use of a binding authority.
    • What the advantages and disadvantages are for all parties of transacting business by a line slip.
    • What the advantages and disadvantages are for consortium members of accepting business as part of the consortium.
    • Explain the management and controls around the different methods of placement.
    • The types of underwriting controls that an insurer may have in place.
    • What conduct and product risk are.
    • An insurer's selection and approval process when participating on a line slip, as a consortium member, or when arranging a binding authority agreement.
    • The role of the Prudential Regulation Authority, the Financial Conduct Authority and Lloyd's in the regulation of delegated underwriting authorities.
    • The different levels of underwriting and claims authority that may be granted by an insurer under a delegated underwriting authority agreement, and when a Third Party Administrator/Delegated Claims Administrator may be used.
    • What information is regularly provided to insurers and how they continuously monitor delegated underwriting authorities.
    • What an audit is, who is audited by an insurer, and the aspects that are checked.

How to prepare

Work through the topics, read the explanation after each answer, and revisit the areas where you miss questions. Use the official outline and reference materials below to guide your study.

These independent practice questions are not actual exam items and do not guarantee a passing result.

Frequently asked questions

What is the exam format?

On-screen multiple-choice examination at an exam centre or by remote invigilation. Each question has four options and one correct or best response; based on English law and practice unless otherwise stated.

How many questions are on the exam?

Total questions: 75.

How long is the exam?

2 hours of examination time under standard conditions; familiarisation/tutorial activities are separate from this answering time.

What is the passing score?

Standard pass mark: 70%. CII adjusts MCQ marks where necessary for exam-version difficulty and reports adjusted marks relative to the standard; 70% is not a guarantee of an identical raw-score threshold on every paper.

How much does the exam cost?

GBP prices checked 30 October 2026: the LM3 page's default Enrolment plus package displays £280.52 for members and £382.28 for non-members. Includes digital study material/revision aids for 12 months and an assessment-entry voucher valid for 18 months. This is a combined package price, not a standalone examination or resit fee. Printed options incur postage and packaging; other purchase selections may differ.

Official sources and references

Confirm current exam arrangements with the exam provider.