Chapter 2: Insurance Products Flashcards
2 Criteria for a risk to be insurable
- The policyholder must have an interest in the risk being insured, to distinguish between a risk and a wager.
- A risk must be of a financial and reasonably quantifiable nature.
Ideally, risk events also need to meet the following criteria to be insurable:
- Individual risk events should be independent of each other.
- The probability of the event should be relatively small. In other words, an event that is nearly certain to occur is not conducive to insurance.
- Large number of potentially similar risks should be pooled in order to reduce the variance and hence achieve more certainty.
- There should be an ultimate limit on the liability undertaken by the insurer.
- Moral hazards should be eliminated as far as possible because these are difficult to quantify, result in selection against the insurer, and lead to unfairness in treatment between one policyholder and another.
Additional characteristics that most non-life insurance products share
- Cover is normally for a fixed period, most commonly one year, after which it has to be renegotiated.
- Claims are not usually for fixed amounts, and the amount of loss as well as the fact that a loss occurred, needs to be proven before a claim can be settled.
- A claim occurring does not bring the policy to an end.
- Claims may occur at any time during the policy period.
“Short-tail” versus “Long-tail” insurance classes
Classes of insurance in which claims tend to take a long time to settle are known as “long-tail”
and
Those which tend to take a short time to settle are known as “short-tail”.
4 Main headings of insurance classes
- Liability
- Property damage
- Financial loss
- Fixed benefits
Liability insurance
To provide indemnity where the insured, owing to some form of failure or negligence, is legally liable to pay compensation to a third party.
Any legal expenses relating to such liability are usually also covered.
5 Main types of liability insurance
- Employers’ liability
- Motor 3rd party liability
- Public liability
- Product liability
- Professional indemnity
Liability insurance benefits payable may be restricted by: (2)
- A maximum indemnity per claim or per event (may involve more than one claim), or an aggregate maximum per year
- An excess (meaning that the insured has to bear the first fixed amount of a claim rather than recovering it from the insurer)
Benefits and insured perils:
Employers’ liability
The insurance indemnifies the insured against legal liability to compensate an employee or his/her estate for bodily injury, disease or death suffered, owing to negligence of the employer in the course of employment.
The perils can be grouped into the following:
- Accidents caused by the negligence of the employer or his employees
- Exposure to harmful substances
- Exposure to harmful working conditions
Benefits and insured perils:
Motor 3rd party liability
Indemnifies the owner of a motor vehicle against compensation payable to third parties for personal injury or damage to their property.
Benefits and insured perils:
public liability
The insured is indemnified against legal liability for the death of or bodily injury to a third party or for damage to property belonging to a third party, other than those liabilities covered by other liability insurance.
Benefits and insured perils:
Product liability
The insurance indemnifies the insured against legal liability for the death of or bodily injury to a third party or for damage to property belonging to a third party, that results from a product fault.
Benefits and insured perils:
Professional indemnity
The insured is indemnified against legal liability resulting from negligence in the provision of a service.
Property damage insurance
Serves to indemnify the policyholder against loss of or damage to his/her own material property.
6 Main types of property subject to damage (on property insurance)
- Residential building
- Moveable property
- Commercial building
- Land vehicles
- Marine craft
- Aircraft
