Chapter 1: Insurance Products - Background (F203 Appx. 1) Flashcards
3 Conditions for a risk to be insurable
- the policyholder must have an INSURABLE INTEREST in the risk, to distinguish between insurance and gambling
- a risk must be of a FINANCIAL & REASONABLY QUANTIFIABLE nature
- the amount payable by the insurance policy in the event of a claim must bear some relationship to the financial loss incurred.
6 Criteria of insurable risk
- Individual risk events should be INDEPENDENT of each other
- PROBABILITY of the event should be relatively SMALL.
- Many similar risks should be POOLED to reduce the variance of the average claim.
- There should be an OVERALL LIMIT on the liability undertaken by the insurer.
- MORAL HAZARD should be eliminated as far as possible.
- sufficient existing statistical DATA / information to estimate size & likelihood.
Uberrima fides
Latin for “utmost good faith”
The honesty principle is assumed to be observed by the parties of an insurance contract.
Misrepresentation or non-disclosure of any material fact in the proposal can make the policy void.
3 Reasons for a Nil claim
- claim is found to be INVALID
- loss amount is LESS THAN THE EXCESS
- policyholder reported the claim in order to comply with the conditions of the policy, but elected to meet the cost in order to preserve any entitlement to NO-CLAIM DISCOUNT.
principle of average
… if the sum insured is less than the full value of the property at the time of a loss,
… the insured 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
A form of insurance cover for which
… the sum insured is less than the full reinstatement-as-new value.
The insured bears any loss in excess of the sum insured.
Subrogation
the substitution of one party for another as creditor, with a transfer of rights and responsibilities.
Means that:
… the insurer replaces the policyholder in law
… and acquires all rights and responsibilities in legal matters regarding the loss suffered,
… be it before or after the claim has been settled.
Discovery period
A time limit on the period within which claims must be reported.
(usually defined in policy wording or legislative precedent)
Underwriting
consideration of insurable risk on individual policies
This includes assessing ... whether the risk is acceptable, and - if so: ... the appropriate premium, ... together with terms and conditions of the cover.
The policy document
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 / small commercial policies, in the sense that an insurer will use the same wording to all policyholders.
ITEMS THAT VARY between policyholders will be included in a schedule
7 Common items in a schedule (on a policy document)
- details of vehicle / property / people covered
- excess applied
- any limits to cover
- exclusions
- time limits
- whether or not any optional covers have been taken
- details of insurance premium paid
Exclusions
Clauses in a policy that limit the circumstances in which a claim may be made
4 Examples of common exclusion
- self-inflicted injury
- dangerous pastimes
- loss resulting from illegal activity by the policyholder, eg accident while drunk-driving
- war, terrorism, civil riot
Exclusions are used to avoid payment by the insurer in 4 situations:
- the policyholder is at an advantage through possessing greater personal information about the likelihood of a claim
- the claim event is largely under the control of the policyholder
- the claim event would be very difficult to verify
- the 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.
However, war risk is specifically excluded.
4 Types of general insurance cover
- liability
- property damage
- financial loss
- fixed benefits
Liability insurance
Liability insurance provides indemnity where the insured is legally liable to pay compensation to a 3rd party.
3 Examples of liability insurance
- Employer’s liability
- Motor third party liability
- Product liability
Employers’ liability
indemnifies the employer against compensation
… payable to employees for losses that they suffer
… as a result of the negligence of the employer.
Motor 3rd party liability
indemnifies the owner of a motor vehicle against compensation
… payable to 3rd parties
… for personal injury or damage to their property
Product liability
Indemnifies a manufacturer against compensation
… to a 3rd party for losses that they suffer
… as a result of a product fault.
Property damage insurance
Provides indemnity to the insured for loss of, or damage to, the policyholder’s own property.
3 Examples of property damage insurance
- motor insurance
- buildings insurance
- contents insurance
Financial loss insurance
Indemnifies the insured against financial losses arising from certain causes.
2 Examples of financial loss insurance
- Creditor insurance
- Business interruption cover
Creditor insurance
policy will make regular loan repayments if the policyholder becomes disabled (so that they cannot work) or otherwise unemployed.
Business interruption cover
policy will compensate the policyholder for not being able to conduct their business,
eg as a result of a fire in the building.
Fixed benefit insurance
Insurance where the benefits 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”
Insurance products sold to businesses.
6 Main feature “headings” of insurance products
- Benefits
- Insured perils
- Basis for cover
- Measures of exposure to which premiums are related
- Claim characteristics
- Risk factors and rating factors
Peril
A type of event that may cause losses (eg theft or flood).
3 types of Basis for cover
- losses-occuring, or
- claims-made
policies - risks-attaching basis
Losses-occurring policy
Policy providing cover for losses occurring in the defined period no matter when they are reported.
Claims-made policy
Covers all claims reported to an insurer within the policy period, irrespective of when they occurred.
Exposure measure
An indication of the level of risk a policy presents to the insurer.
Pure risk premium
The premium required to cover the expected claim amount only.
No allowance is made for expenses or profit.
Measures of exposure
Measures that give an indication of how much risk there is within each insurance policy.
2 Key criteria of measures of exposure
It should be a GOOD MEASURE of the amount OF RISK:
- allowing the expected FREQUENCY
- and expected SEVERITY of a claim.
It should be PRACTICAL
3 items that need to be confirmed before a claim can be settled:
- whether or not there has been a loss
- whether or not the insured is liable
- the amount of the loss
Claim characteristics
Refer to the amount that becomes payable for a given claim and to the ways in which and speed with which the claims:
- originate
- are notified
- are settled and paid
- are - on occasion - reopened.
Also refer to the frequency with which claims are made.
Risk factors
Any factors that have a bearing on the amount of risk.
Rating factors
Factors that are actually used in the premium rating process.
They are either:
- measurable risk factors, or
- proxies for the underlying risk factors (ie where it is not practical to use the true risk factor)
Underwriting factors
Rating factors, together with subjective factors, that cannot be measured, but will still be taken into account when setting premiums / policy conditions.
10 Factors that affect the level of risk and uncertainty of a class of business
<strong>Risks</strong>:
- HOMOGENEITY of risks
- NON-INDEPENDENCE of risks
- CHANGING risks
<strong>Claims</strong>:
- NUMBER of claims
- claims COST
- claim INFLATION
- FRAUDULENT claims
<strong>Experience</strong>:
- DELAY patterns
- VARIABILITY of experience
- ACCUMULATIONS
Solvency capital
Capital over and above the insurer’s technical reserves.
What is meant by an exposure measure being “practical”
The measure should be
- objectively measurable
- easily obtainable,
- verifiable
- not open to manipulation.
