5. General Insurance Flashcards
A prerequisite for a valid insurance contract
Insurable interest
How can imprecision in the wording of the contract lead to problems for the insurer:
- Liability for payments the company did not anticipate
- Possible litigation and legal battles
- Failure to make payments on claims could lead to bad publicity
Liability policy
Insurance against the risk that the insured becomes legally liable to pay compensation to a third party.
Why is an excess payable by the holder often specified:
- to discourage small claims
- to reduce the cost of reinsurance
What claims are usually excluded from liability insurance? (7)
claims due to:
- aviation other than as a passenger,
- suicide or self-inflicted injury
- existing disability
- the use of alcohol or drugs other than medically prescribed
- dangerous sporting activities
- civil unrest
- pregnancy
Length of tail
The length of time it takes for a claim to be reported and settled.
4 Main types of liability insurance
- Employers’ liability
- Public liability
- Product liability
- Professional indemnity
Employers’ liability insurance
Indemnifies the insured.
I.e. you as the employer, if you become legally liable to compensate an employee or their estate for bodily injury, disease or death suffered in the course of employment.
Public liability insurance
Indemnifies the insured against legal liability for bodily harm to a third party or for damage to property belonging to a third party.
Product liability insurance
All sellers could become liable for injury, illness, loss or damage caused by the provision of such goods. (Thus product liability insurance indemnifies the sellers, manufacturers, etc.)
Professional indemnity insurance
As a professional one is liable to give proper service and advice to one’s clients. Owing to negligence, one may be liable for losses to one’s clients.
Consequential loss cover
Protects the earnings capacity of a business following a property loss.
Personal accident policies
Insurances which stipulate the payment of specified fixed amounts in the event of you or your dependants suffering the loss of certain limbs or other specified ailments.
Motor vehicle insurance
Covers loss of your vehicle, damage to it and compensation to third parties arising out of your use of it.
Three main types of Marine insurance cover:
- Hull (the ship itself)
- Cargo (what is transported by the ship)
- Freight
Define the freight
The money paid for shipment of the cargo.
What risks are not commonly covered by a marine insurance policy
Indemnity for liability in respect of:
- Loss of life or personal injury resulting from accidents
- Liability for damage to harbours,
- The cost of removing wrecks
- Pollution
Common marine insurance exclusions:
- Unseaworthiness of vessels
- Unfitness of containers
- Illegal use
- Use outside geographical limits stated in the policy
- If piloted by someone not specified in the policy.
- War
- Strikes
- Malicious acts, including hijacking
- Acts involving nuclear means,
A comprehensive aviation policy covers:
- accidental damage to the aircraft hull
- legal liability for injury to persons or damage to property on the ground
- legal liability to passengers for personal injury or damage to their personal effects.
Aviation policy insurance exclusions:
In addition to the exclusions which apply to marine policies
- Whilst landing or taking off in places not conforming with the specifications of the manufacturer.
- If the number of passengers exceeds the maximum number stated in the policy.
Insurance company
A company which provides general insurance to both individuals and to companies.
Most are proprietary, some are mutuals.
Proprietary companies
Companies owned by shareholders
Mutuals
Companies owned by their policyholders
Composite
A company that has been authorised to write both life and general insurance business.
Captive insurance company
An insurer wholly owned by a non-insurance industrial or commercial enterprise set up with the primary purpose of insuring the parent.
Advantages of a captive: (6)
- Gaps in insurance cover can be filled
- Tax and other legislative advantages can be gained by setting up an offshore captive
- The parent company can treat premiums as a business expense.
- It gives the company the pros and cons of self-insurance
- If the parent is actually a group with many different subsidiaries then owning a captive may enable much larger risks to be borne by the group than individual subsidiaries could bear.
- An authorised captive is free to provide insurance to risks other than those of its parent.
Open market captives
An authorised captive that provides insurance to risks other than those of its parent.
Reinsurance
An insurance company’s own insurance.
Direct writer
The insurer with a direct contact with the insured.
Retrocession
The practice of one reinsurance company essentially insuring another reinsurance company.
The process of coinsurance
Under coinsurance the insured has a legal contract with each co-insurer simultaneously.
Each co-insurer will be responsible for a stated proportion of the risk.
Premiums are paid to each co-insurer in the stated proportion and the insured would make a separate claim to each co-insurer.
Under what condition is coinsurance most commonly used
Under very large risks - where one insurer is not prepared to take on the whole risk.
The only type of proportional reinsurance used in general insurance business.
Original Terms. (As with life insurance the original contract is shared between the direct writer and the reinsurer in the proportion agreed at the outset)
Two ways the split between the direct writer and the reinsurer can be determined:
- Quota Share
- Individual Surplus
Quota Share
The direct writer agrees to retain a fixed proportion of each contract and cedes the balance to the reinsurer.
Individual surplus
Everything above the retention limit on each contract is ceded to the reinsurer.
Expected Maximum Loss (EML)
The largest loss which could, within the realms of possibility, arise from a single event. (It is only used to determine the split of the contract between the direct writer and the reinsurer, and does not form a limit on any claim payment.)
Non-proportional reinsurance
The proportion of the risk borne by the reinsurer is not determined at outset and depends on the size of claims made.
Individual Risk Excess of Loss
The reinsurer provides cover against individual claims above the Excess Point up to an agreed Upper limit.
A Layer
The cover given by a reinsurer (Upper Limit - Excess Point).
Aggregate Excess of Loss
A simple extension of Risk extension of loss.
The excess point and upper limit will relate to claims which have been aggregated in some way rather than to individual claims.
3 Methods of aggregation with AXL
- By Event
- By Cause
- By Class
Aggregation by event
All claims resulting from a given event are added together.
Aggregation by cause
All the claims resulting from a given cause are added together.
Aggregation by class
All claims from a given class of business are added together.
The main difference between Catastrophe Excess of Loss and Aggregate XL by cause
Catastrophe XL operates at a much higher level of aggregate cover.
Stop Loss reinsurance
All the claims from a given class of business are added together over a specified period.
Stop loss cover is generally only available when:
- losses are quite variable
- poor experience is not the underwriter’s fault
Exposure measure
The basic measure of risk for a policy.
The exposure measure should: (4)
- Be a good measure of the amount of risk.
- Be measurable
- Be verifiable and easily obtained
- Not be capable of being manipulated.
Risk factor
An underlying factor which is expected to have an influence on the amount of risk.
Rating factor
A factor actually used in the rating process.
It must be a risk factor or a proxy for a risk factor.
5 Costs that need to be covered by the premium
- Risk premium
- Any contingency loading
- Expenses
- Commission
- Profit margin
Risk premium
The premium that would need to be charged to cover the expected cost of claims.
Any contingency loading
An additional amount often charged to cover the cost of any unexpected risks.
Basic equation of value:
Premiums (EPV) = Claims (EPV) + Contingency loading (EPV) + Expenses (EPV) + Profit margin (EPV)
EPV = Expected Present Value
Indemnity
You are entitled to recover the actual commercial value, at the time, of what you have lost through the occurrence of the insured event.
How do hospital expense plans work?
They pay a fixed daily amount for each day you are treated in a hospital as an in-patient regardless of the expenses incurred for the treatment.
Health insurance
Insurance to meet medical costs, or part of them, and as such is an indemnity insurance.
A Health Insurance policy may have several limits on benefits such as: (3)
- Limiting the price range of hospital you may elect to stay in.
- Limiting the benefit in respect of each aspect of the hospital treatment.
- Limiting the aggregate amount you can claim in a year.
In respect of personal accident cover the exclusions may be in respect of: (6)
- self- inflicted injuries
- cosmetic surgery
- suicide
- alcohol or drug abuse
- unlawful activities
- dangerous sports
What is N.C.D.? (No Claims Discount)
It lowers the percentage of the full premium you have to pay down to some minimum e.g. 40% provided you do not make a claim where that claim is ultimately regarded as your fault or at least no one else can be found to carry blame.
Motor policies are commonly divided into 4 types:
- private car
- commercial vehicles
- motor cycles
- motor fleet
How Lloyd’s insurance works:
It is provided by Syndicates (groups) of Names (the “insurers”). Names share in the profits or losses made by a syndicate, in proportion to the amount of each Name’s Premium Income Limit (the maximum amount of premium that they are allowed to write) which has been allocated to that syndicate. Each Name may spread its risk by belonging to several syndicates.
Lloyd’s prides itself on its track record of never having defaulted on claim payments. How do they achieve this high level of security?
By having 3 layers of security:
- Syndicate assets: All premiums achieved are held in trust from which claims and expenses are paid, and no profits are released to Names until all liabilities have been provided for.
- Member funds at Lloyd’s: This is the amount of capital that must be deposited by Names to support their Premium Income Limit. It ensures that a syndicate will have sufficient assets to meet its claims.
- Lloyd’s central assets: These are available if the first 2 levels are insufficient to meet claims. This fund is financed through a levy on premiums received by the syndicate each year.
What are P and I Clubs (Protection and Indemnity Clubs)?
Clubs that were originally formed to cater for certain types of marine risks that could not be covered under marine policy, for example indemnity for liability for damage to harbours, wreck removal, pollution.
Major uncertainties faced by general insurers centre around: (2)
- Claim frequency
- Claim amount
5 main classes of insurance often distinguished in practice
- Liability
- Property
- Personal accident and Health insurance
- Motor
- Marine and Aviation
