CAS - Government Insurers

Question 1

Identify the LEVELS of government involvement in insurance & examples.

Answer 1

• as sole provider (CPP)
• as a provider in PARTNERSHIP with private insurance (crop insurance)
• as a provider in COMPETITION with private insurance (WC in some states)

Question 2

Identify REASONS for government participation in insurance. (5)

Answer 2

i) FILLING insurance needs unmet by private insurance (crime, terrorism)
ii) COMPULSORY purchase of insurance (BC Auto)
iii) CONVENIENCE: the government may already have necessary structure and funding in place, like with flood
iv) Greater EFFICIENCY: lower premiums for consumer since lower expense ratio due to no agent commissions
v) SOCIAL purposes (medical)

Question 3

Identify examples for each reason for government participation in insurance. (5)

Answer 3

i) FILLING insurance need: crime, flood, terrorism, crop
ii) COMPULSORY purchase of insurance: BC Auto
iii) CONVENIENCE: flood, terrorism
iv) Greater EFFICIENCY: flood, auto
v) SOCIAL purposes: medical, CPP

Question 4

Why might government insurance succeed where private insurance fails?

Answer 4

Government insurance can SUBSIDIZE losses through taxes.

Question 5

How can government insurance subsidize losses? (2)

Answer 5

• general tax revenue

- charge less than the actual cost of insurance & fill gap with special fund

Question 6

Why might government insurance exist when insurance is compulsory? (2)

Answer 6

• if private insurance IS NOT available, government would be the sole provider
• if private insurance IS available, profits should be limited due to guaranteed market that government created

Question 7

Identify a private market mechanism that provides compulsory insurance to high-risk insureds.

Answer 7

Risk-sharing pool or residual markets (Facility Association).

Question 8

Why may government insurance be more convenient to operate? Provide some examples.

Answer 8

They may already have the necessary structures in place.
Eg: DFAA (Disaster Financial Assistance Arrangements) already exists and dovetails with insurance for flood and terrorism.

Question 9

Why may government insurance be more efficient for auto insurance?

Answer 9

Through eliminated agent commissions, expenses will be reduced and this will translate into reduced premiums for the consumer.

Question 10

Why may efficiency of government insurance be overstated? (2)

Answer 10

• other government departments may already be performing services normally provided by insurer
• however, the cost of these services may not be included in expenses since they are being absorbed by another department, thus the expenses are being understated
  Eg: investing, property appraisal

Question 11

Why may government insurance be better at social purposes? (3)

Answer 11

• Motivation: private insurance are motivated by profit, not social purpose
• Complexity: some programs are too large & comprehensive for private companies
• Legislation: enact building codes for risk mitigation.

Question 12

Identify criteria that a government insurance program should satisfy. (5)

Answer 12

• is it WELFARE or INSURANCE?
• does it achieve SOCIAL purposes not met by private insurance?
• is it EFFICIENT?
• is it ACCEPTED by the public?
• is it NECESSARY?

Question 13

What are the differences between insurance and social welfare?

Answer 13

INSURANCE: pays upon covered loss REGARDLESS of need; it is funded by insureds
WELFARE: pays BASED on needs; it is funded by general tax revenues

Question 14

Reasons for government to participate in TERRORISM insurance. (2)

Answer 14

Filling an unmet need:
- private market withdrew from terrorism coverage after the 9/11 NYC terrorist attacks
- people expect assistance in recovering from terrorism
Convenience:
- necessary structures already in place (eg: DFAA in Canada)