3. Main Features of Insurance

Question 1

How is insurance a risk transfer mechanism?

Answer 1

Insurer accepts unknown future potential risk for an agreed premium

Replaced uncertainty of possible future loss with the certainty of the agreed premium

Question 2

How do insurers apply law of large numbers?

Answer 2

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

Question 3

Explain the pooling of risks

Answer 3

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

Question 4

How do we get equitable premiums?

Answer 4

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

Question 5

What is the EU Gender Directive?

Answer 5

Transposed into UK Law by the Equality Act 2010 (Amendments) Regulations 2012 following the Test-Achats judgements of ECOJ in March 2011

Question 6

What impact did the EU Gender Directive have?

Answer 6

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

Question 7

What are the benefits of insurance to individual consumers?

Answer 7

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

Question 8

Explain protecting business as a benefit of insurance

Answer 8

• 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

Question 9

How does insurance benefit the economy?

Answer 9

• Premiums are invested to earn interest
• Social benefits eg encouraging business activity and keeping people employed

Question 10

What is co-insurance?

Answer 10

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

Question 11

Co-insurance: Risk sharing with the insured

Answer 11

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

Question 12

Co-insurance: Risk sharing between insurers

Answer 12

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

Question 13

What is dual insurance?

Answer 13

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

Question 14

What is self-insurance?

Answer 14

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

Question 15

What types of insurance are available in the market?

Answer 15

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

Question 16

What is motor insurance?

Answer 16

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

Question 17

What is home insurance?

Answer 17

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

Question 18

What is travel insurance?

Answer 18

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

Question 19

What is pet insurance?

Answer 19

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

Question 20

What are the types of health insurance?

Answer 20

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

Question 21

What is Payment Protection Insurance (PPI)?

Answer 21

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

Question 22

What types of liability insurance are there?

Answer 22

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

Question 23

What types of cover do you get in commercial property insurance?

Answer 23

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

Question 24

What is pecuniary insurance?

Answer 24

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

Question 25

What is marine insurance?

Answer 25

Covers 3 main areas of risk:

1. Marine hull - physical damage to ship, machinery and equipment
2. Marine cargo - loss or damage to goods
3. Marine freight - sum paid for transporting goods or for vessel hire

Question 26

What is aviation insurance?

Answer 26

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

Question 27

What are Combined or Packaged insurance policies?

Answer 27

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

Question 28

What is IPT?

Answer 28

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

Question 29

Who is exempt from IPT?

Answer 29

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