Chapter 1: Insurance products - background Flashcards
Conditions for a risk to be insurable
- policyholder must have an interest in the risk being insured to distinguish between insurance and gambling
- risk must be of financial and reasonably quantifiable nature
- amount payable by insurance policy in the event of a claim must bear some relationship to the financial loss incurred
Criteria of insurable risk
- inidividual risk events should be independent
- probability of risk event should be relatively small
- large numbers of similar risks should be pooled to reduce the varaiance of the average claim size and hence achieve more certainty
- should be overall limit on liability undertaken by the insurer
- moral hazards should be eliminated as far as possible
- should be existing sufficient statistical data/information to estimate the size and likelihood
Moral hazard
The risk that the insured may behave in a less risk averse manner when they are insured
Uberrima fides
Latin for “utmost good faith”
The honesty principle is assumed to be observed by the parties to an insurance or reinsurance contract. An alternative form is uberrimae fidei: “of the utmost good faith”
Misrepresentation/non-disclosure of material fact in the proposal can make the policy void.
Possible reasons for Nil claims
- claim is found not to be valid
- amount of the loss turns out to be no greater than the excess
- policyholder has reported a claim to comply with the conditions of the policy, but has elected to meet the costs to be able to preserve entiltlement to no-claims discount
Nil claim
Claim that results in no payment by the insurer
Why is underinsurance a hazard to the insurer?
The insurer bases premium rates on expected claim amounts. It takes into account frequency and expected size of claim.
Higher sum insured = higher premium. Therefore, with underinsurance, there is a risk that the premiums are inadequate.
Principle of average
If the sum insured is less than the full value of a property at the time of a 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
First loss
Form of insurance cover for which the chosen sum insured is restricted, with the insurer’s agreement, to a figure less than the full reinstatement-as-new value of the property.
Insured bears any loss in excess of the sum insured
Subrogation
The substitution of one party for another as creditor, with a tranfer of rights and responsibilities. This means that:
- insurer replaces policyholder in law
- acquires all rights and responsibilities in legal matters regarding the loss suffered (before of after claim has been settled)
Discovery period
A time limit, defined in policy wording or through legislative precedent, placed on the period within which claims must be reported.
Underwriting
Process of consideration of insurance risk on individual policies.
Includes assessing whether risk is acceptable and if so:
- Appropriate premium
- Terms and conditions of the cover
The term is also used to denote the acceptance of reinsurance and the transacting of insurance business.
The policy document
Legally binding contract that sets out the terms and conditions under which an insurer is liable to pay insurance claims in specific circumstances.
A schedule (on a policy document)
Policy forms are normally standard for all personal lines business and small commercial policies, in the sense that the insurer will issue the same wording to all policyholders.
Items that vary between policyholders will be included in a schedule.
Common items in a schedule
- details of vehicle/property/people covered
- excess applied
- any limits on the cover
- exclusions
- time limits (e.g. hours clause)
- whether/no any optional covers have been taken
- details of insurance premium paid
Aims of having an excess
- reduce amount of each claim
- reduce the number of claims
- eliminates small claims just above the excess
- encourages policyholders to be more careful
- allows company to reduce premiums and appear more competitive
Deductible
A portion of a loss that is paid by the policyholder. It may be an amount of percentage.
Exclusions
Clauses in a policy that limit the circumstances in which a claim may be paid.
Examples of common exclusions
- self-inflicted injuries (for personal-accident benefits)
- dangerous pastimes
- loss resulting from an illigal activity by the policyholder
- war, terrorism, civil riots
Exclusions are used to avoid payment by the insurer in situations where:
- policyholder is at an advantage through possessing greater personal information about the likelihood of a claim
- claim event is largely under the control of the policyholder
- claim event would be difficult to verify
- loss occurs as part of the normal course of events and could be considered to be depreciation
SASRIA
South African Special Risks Insurance Association
SASRIA insures extraordinary risks that conventional insurers are reluctant or unable to cover such as damages arising from civil unrest, terrorism, labour action etc.
War risk is specifically excluded.
Reasons for applying exclusions to an insurance policy
To avoid payment in situations where:
- policyholder is at an advantage through possessing greater personal information about the likelihood of a claim
- claim event is largely under the control of the policyholder
- claim event would be difficult to verify
- loss occurs as part of the normal course of events and could be considered to be depreciation
Where risk can’t be reliably estimated by the insurer
When the probability of loss is very high
Risk is covered by a third party such as the government
Limit the scope of the policy to make it more appropriate for a particular target market
Reduce premium for competitive reasons
Reduce the risk of moral hazard and fraud
Types of general insurance cover
- liability
- property damage
- financial loss
- fixed benefits
Liability insurance
Indemnity against the risk of being held legally liable to pay compensation to a third party
Examples of liability insurance
- Employers’ liability
- Motor third party liability
- Product liability
Property damage
Indemnity to the insured for loss of, or damage to, the policyholder’s own property
Examples of property damage insurance
- motor insurance
- buildings insurance (includes both residential and commercial buildings)
- contents insurance
Financial loss insurance
Indemnifies the insured against financial losses arising from certain causes.
