Chapter 1 - Insurance Products (Background)

Question 1

Moral Hazard

Answer 1

The risk that an insured may act differently because they are insured

Question 2

9 Elements of an insurable risk/interest

Answer 2

IF CAP MILL
1. Interest: Policyholder must have an interest in the risk being insured
2. Financial and reasonably quantifiable: Quantifiable i.t.o severity and frequency
3. Commensurate loss size with claim made
4. Adequate data to price risk
5. Probability of risk event should be small
6. Moral hazard and anti-selection should be avoided as far as possible
7. Independence of individual risks
8. Law of large number to reduce variance of claims
9. Limit to overall liability for insurer to pay

Question 3

Nil Claim (AKA Zero Claim)

Answer 3

A claim that results in no payment by the insurer

Question 4

Principle of Average

Answer 4

A clause used in insurance contracts to indemnify the insurer against policyholder underinsurance. If the sum insured is less than the full value of the property at time of loss, the insurance payment will only be a proportion of the value of the loss - the same proportion as the sum insured bears to the full value

Question 5

Condition of Average Formula

Answer 5

(Sum Insured / Value at Risk) x Amount of Loss

Question 6

First Loss

Answer 6

A form of insurance cover for which the chosen insured is restricted with the insurer’s agreement, to a figure less than the full reinstatement-as-new value of the propert

Question 7

Subrogation

Answer 7

The substitution of one part for another as creditor, with a transfer or rights and responsibilites

Question 8

Discovery Period

Answer 8

The period in which claims must be reported

Question 9

Sunset clause

Answer 9

The clause in an insurance contract that defines the time limit used for the discovery period

Question 10

Underwriting

Answer 10

Process of consideration of insurance risk on individual policies

Question 11

Deductible

Answer 11

A portion of a loss that is paid by the policyholder

Question 11

Deductible

Answer 11

A potion of a loss that is paid by the policyholder

Question 12

Hours Clause

Answer 12

A provision in a reinsurance contract requiring the time at which a loss occurs to be reported, and sometimes, restricting coverage to a certain time frame - the time period over which a catastrophe is considered a single event

Question 13

Exclusions

Answer 13

Clauses in a policy that limit the circumstances in which a claim may be made

Question 14

Liability insurance

Answer 14

Insurance that provides indemnity where the insured is legally liable to pay compensation to a third party

Question 15

Property Damage Insurance

Answer 15

Insurance that provides indemnity to the insured for the loss of, or damage to, the policyholder’s own property

Question 16

Financial Loss Insurance

Answer 16

Insurance that indemnifies the insured against financial loss arising from certain clauses

Question 17

Fixed Benefit Insurance

Answer 17

Insurance that has benefits which are specified fixed amounts payable on certain losses occurring which may or may not be enough to compensate the policyholder for the full loss incurred

Question 18

Personal lines business

Answer 18

Insurance products sold to individuals

Question 19

Commercial lines business

Answer 19

AKA group business. Insurance products sold to businesses

Question 20

Supported policies

Answer 20

Policies for small business that often include all types of cover the business needs apart from motor insurance

Question 21

Peril

Answer 21

A type of event that may cause losses

Question 22

Losses-occurring policy

Answer 22

A policy providing cover for losses occurring in the defined period no matter when they are reported. AKA claims-occurring

Question 23

Claims-made Policy

Answer 23

A policy that covers all claims reported to an insurer within the policy period irrespective of when they occurred

Question 24

Insurance endorsement

Answer 24

A change or addition to an insurance contract that alters the terms or scope of the original policy

Question 25

Tail Coverage

Answer 25

AKA extended reporting period (ERP). Coverage provided as an add-on that becomes available only after a policy has been terminated. Attached on claims made policies usually

Question 26

Exposure measure

Answer 26

An indication of the level of risk a policy presents to an insurer

Question 27

Pure risk premium

Answer 27

The premium required to cover the expected claim amount only

Question 28

Actual premium

Answer 28

The premium charged that would cover the level of risk of a policy (i.e. pure risk premium) with an allowance for expenses, profit, investment income and any other loadings

Question 29

Measures of exposure

Answer 29

Measures that give an indication of how much risk there is within each policy

Question 30

2 criteria for a measure of exposure

Answer 30

1) It should measure the amount of risk (allowing for both the expected frequency of claim and the expected severity of claim)
2) It should be practical

Question 31

Risk factor

Answer 31

Any factor that has a bearing on the amount of risk presented by a policy

Question 32

Rating factor

Answer 32

Factors that are more easily identified and may be used for the underlying risk factors

Question 33

Underwriting factors

Answer 33

Rating factors that include subjective elements that, although they cannot be measured, the underwriter takes into account in setting premiums or policy conditions

Question 34

Latent Claims

Answer 34

A claim that arises from a risk not anticipated by the underwriter and not priced for in the original policy

Question 35

Attritional Claims

Answer 35

Small claims. As opposed to large claims which are usually modelled separately