Chapter 2 - Insurance Product Background

Question 1

Which 3 characteristics must a risk have for it to be insurable?

Answer 1

• The policyholder must have an interest in the insured risk. This is to differentiate between insurance and a wager.
• The risk must be of a financial and reasonably quantifiable nature.
• The amount payable in the event of a claim must bear some relationship to the financial loss incurred.

Question 2

In addition to the 3 main criteria for an insurable risk, what other characteristics should an insured risk also have?

Answer 2

Moral hazard Avoided
Ultimate limit on liability
Data available to assess the risk
Probability of the insured event is low
Independence of risk
Similar risk pooled together

Question 3

What characteristics must a good exposure measure have?

Answer 3

Verifiable
Easy to obtain
Non - Manipulatable
Objective
Measurable

Acceptable to the market.
Defines the risk
Acceptable to the policyholder