Chapter 1 - Insurance Products (Background) Flashcards
Moral Hazard
The risk that an insured may act differently because they are insured
9 Elements of an insurable risk/interest
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
Nil Claim (AKA Zero Claim)
A claim that results in no payment by the insurer
Principle of Average
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
Condition of Average Formula
(Sum Insured / Value at Risk) x Amount of Loss
First Loss
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
Subrogation
The substitution of one part for another as creditor, with a transfer or rights and responsibilites
Discovery Period
The period in which claims must be reported
Sunset clause
The clause in an insurance contract that defines the time limit used for the discovery period
Underwriting
Process of consideration of insurance risk on individual policies
Deductible
A portion of a loss that is paid by the policyholder
Deductible
A potion of a loss that is paid by the policyholder
Hours Clause
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
Exclusions
Clauses in a policy that limit the circumstances in which a claim may be made
Liability insurance
Insurance that provides indemnity where the insured is legally liable to pay compensation to a third party
Property Damage Insurance
Insurance that provides indemnity to the insured for the loss of, or damage to, the policyholder’s own property
Financial Loss Insurance
Insurance that indemnifies the insured against financial loss arising from certain clauses
Fixed Benefit Insurance
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
Personal lines business
Insurance products sold to individuals
Commercial lines business
AKA group business. Insurance products sold to businesses
Supported policies
Policies for small business that often include all types of cover the business needs apart from motor insurance
Peril
A type of event that may cause losses
Losses-occurring policy
A policy providing cover for losses occurring in the defined period no matter when they are reported. AKA claims-occurring
Claims-made Policy
A policy that covers all claims reported to an insurer within the policy period irrespective of when they occurred
Insurance endorsement
A change or addition to an insurance contract that alters the terms or scope of the original policy
Tail Coverage
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
Exposure measure
An indication of the level of risk a policy presents to an insurer
Pure risk premium
The premium required to cover the expected claim amount only
Actual premium
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
Measures of exposure
Measures that give an indication of how much risk there is within each policy
2 criteria for a measure of exposure
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
Risk factor
Any factor that has a bearing on the amount of risk presented by a policy
Rating factor
Factors that are more easily identified and may be used for the underlying risk factors
Underwriting factors
Rating factors that include subjective elements that, although they cannot be measured, the underwriter takes into account in setting premiums or policy conditions
Latent Claims
A claim that arises from a risk not anticipated by the underwriter and not priced for in the original policy
Attritional Claims
Small claims. As opposed to large claims which are usually modelled separately
