3. Main Features of Insurance Flashcards
How is insurance a risk transfer mechanism?
Insurer accepts unknown future potential risk for an agreed premium
Replaced uncertainty of possible future loss with the certainty of the agreed premium
How do insurers apply law of large numbers?
Insurers cover number of similar risks and final number of actual loss events tend to be very close to expected number
Able to predict likely cost of claims and use this to fix premium
Competitive pressure and desire to grow / defend market share can impact
Explain the pooling of risks
Losses of the few are met by the contributions of the many - premiums go into pool and claims paid from it
Number of separate pools for different classes of insurance
Contributions must be large enough to meet losses in any one year, cover operating costs and have element of profit
Aim to make sure premium is fair in relation to risk they introduce to pool
How do we get equitable premiums?
Different pools are set up for each main group of risks eg motor - insurers take into account different elements of risk brought to the pool (discrimination factors)
Assess fair premium and profit
What is the EU Gender Directive?
Transposed into UK Law by the Equality Act 2010 (Amendments) Regulations 2012 following the Test-Achats judgements of ECOJ in March 2011
What impact did the EU Gender Directive have?
From 21 Dec 2012 - can’t use gender as factor in pricing or benefits and all firms must comply regardless if insurer or adviser
Some gender-related practices are still allowed under the directive
- To reflect physiological differences in questions, tests and interpreting medical results
- Use of different tests by gender when necessary eg mammograms or prostate screening
- Collect info on gender status and asking questions about gender specific diseases
What are the benefits of insurance to individual consumers?
Peace of mind
Whether they will want insurance depends on:
- Attitude to risk
- Price prepared to pay
- If they feel they have a choice about insuring a risk
Explain protecting business as a benefit of insurance
- Improved cash flow as doesn’t have to be kept in reserves
- Expansion of business (easier for new business to start or existing to invest, innovate or expand)
- Improved loss control which can reduce economic waste that follows a loss, insurers have interest in reducing frequency and severity of losses.
Less business interruption and inconvenience as effects of loss are minimised
How does insurance benefit the economy?
- Premiums are invested to earn interest
- Social benefits eg encouraging business activity and keeping people employed
What is co-insurance?
Insurers decide maximum limits of acceptance for particular categories of risk so the insurer must find a way of sharing the risk with others
Main way this is done is co-insurance
Co-insurance: Risk sharing with the insured
The amount of a risk the insured is willing to retain
Excess = small fixed sum retained by insured
Deductible = large fixed sum
Where insured responsible for substantial proportion of each loss through choice (lower premium) or necessity then it’s called co-insurance
Deters them from making small claims and take more care to prevent damage or loss
Co-insurance: Risk sharing between insurers
Mainly in London markets
Insurer agreed rating and terms with others and issues collective policy, each insurer receives their proportion of premium and pays same for losses
Each insurer separately liable to insured for their proportion and has direct contractual relationship with each co-insurer
Lead office will settle losses add recoup money from the other insurers
What is dual insurance?
Two or more policies are in force which cover the same risk
Usually by accident where aspect of cover in a package overlaps with primary cover intentionally purchased
What is self-insurance?
An individual / company has decided not to use insurance as a risk transfer mechanism but to carry the risk themselves eg set aside sum each month to cover losses
Term also used when referring to part of a loss that the insured retains
What types of insurance are available in the market?
Personal lines - individual purchases for loss or damage to personal property or from damages they may be held personally responsible
Commercial lines - business purchases for loss of business property or damages the company be held liable for
What is motor insurance?
Most significant compulsory insurance and main types are motor, motorcycle, commercial motor and motor trade
Elements of:
- Property cover: pays for loss to policyholder property
- Casualty cover: pays for damage the policyholder is liable
What is home insurance?
Cover buildings and/or contents (usually new for old basis) against wide range of perils
Valuables, personal effects and public liability are covered
Option extensions are available eg accidental damage cover
What is travel insurance?
Covers individuals travelling within a country or overseas
Single or annual multi trip
Cover eg injury, death, medical expense, loss or luggage and cancellation charges
What is pet insurance?
Primarily designed to cover vet costs if a pet is ill, injured or has an accident
Also covers:
- Purchase price if pet dies due to accidental injury
- Element of third party liability (usually only dogs), injury to third parties or damage to their property
What are the types of health insurance?
Personal accident - event of accidental death or bodily injury
Sickness - inability to work due to sickness
Private medical insurance - medical treatment outside of NHS
Short term income protection - pay agreed monthly amount during short period (12 months) when unable to work due to accident, sickness or redundancy. Have to wait set number of days before get payment which will continue until return back to work or for maximum period (1-2 years)
Critical illness - diagnosis of defined range of serious illnesses
What is Payment Protection Insurance (PPI)?
Covers mostly loan and credit card payments rather than replacing % of insured’s income
Payments go direct to creditors
FCA rules mean can’t be sold as direct add on to a loan taken out due to poor selling and advice practices previously
What types of liability insurance are there?
Covers legal liability to pay compensation and costs awarded against insured in favour of another party for death, injury, disease, loss or damage
Employers liability - compulsory by law, legal liability to pay damages to employee arising from bodily injury, disease, illness or death received in course of employment
Public liability - claims from 3rd parties for accidental bodily injury or damage to property arising from insured / employers negligence
Products liability - 3rd party bodily injury or property damage caused by products, goods or services sold/supplied
Directors and officers liability - personal legal liability incurred by directors and officers for financial loss resulting from their negligence or failure to fulfil statutory responsibilities
Professional indemnity - protects person acting in their professional capacity against claims alleging injury / loss resulting from their negligent actions or advice
What types of cover do you get in commercial property insurance?
Covers risks to actual property
- Fire, special perils and ‘all risks’ policies: material property (buildings), contents and stock. Build up cover by adding perils or all risk where cover is defined by exclusions
- Theft: loss/damage to property usually involving forcible entry and exit
- Engineering / breakdown: explosion, breakdown or accidental damage to plant
- Glass: destruction or damaged to all fixed glass, may extend to contents of window
- Livestock: death through accident, disease, theft and unexplained disappearance
- Money: all risk basis covering all risks of loss, destruction or damage to money in transit, insured premise during business hours or night safe
What is pecuniary insurance?
Relating to money covering intangible such as income, revenue or value
Fidelity guarantee - financial results of lack of fidelity arising from dishonesty or disloyalty of an employee
Legal expenses - individuals, families or businesses so they can meet cost of seeking legal advice or pursuing / defending civil action
Credit - covers against risk of non-payment
Business interruption - losses from business interruption immediately after and in consequence of material damage to property
Political risk - revolution or political conditions that cause loss
Guaranteed Asset Protection - covers gap between amount t paid out nay motor policy and amount still to be paid on finance
What is marine insurance?
Covers 3 main areas of risk:
- Marine hull - physical damage to ship, machinery and equipment
- Marine cargo - loss or damage to goods
- Marine freight - sum paid for transporting goods or for vessel hire
What is aviation insurance?
Covers both loss and damage to aircraft (hull) and legal liability to third parties and passengers
Specialist covers are available
Aviation cargo is covered under a marine policy
What are Combined or Packaged insurance policies?
Brings together number of different types of cover / range of risks under one policy
Commercial Package - provide range of cover automatically for particular trade sectors, cover is inflexible
Commercial Combined - SMEs where more than one type if insurance is required, can be tailored
What is IPT?
Insurance Premium Tax levied by the government on general insurance premiums in the UK, source of revenue
2 main rates:
- Standard 12%
- Higher 20% for travel, some vehicles, domestic and electrical appliances
Collected by insurer in addition to policy premiums and shown separately on documents
Account quarterly to HMRC for tax that is due
Who is exempt from IPT?
Most long term insurances, reinsurance, ships, aircraft and goods in transit (internationally)
Premiums for risks located outside the UK but may be liable to similar taxes imposed by other countries
