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
Benefits and insured perils:
Household and commercial buildings
- Fire
- Explosion
- Lightning
- Theft
- Storm
- Floot
Benefits and insured perils:
Moveable property
- Theft
Benefits and insured perils:
Motor property
- Accidental or malicious damage to the insured vehicle
- fire
- theft
Benefits and insured perils:
Marine property
- Perils of the seas
- Fire
- Explosion
- Jettison
- Piracy
Financial loss insurance can be categorised as: (3)
- Pecuniary loss
- Fidelity guarantee
- Business interruption cover (aka consequential loss)
Benefits and insured perils:
Pecuniary loss
Protects the insured against bad debts or other failure of a third party.
Retrenchment cover is also included in this category.
Benefits and insured perils:
Fidelity guarantee
Covers the insured against financial losses caused by dishonest actions by its employees (fraud or embezzlement).
These will include loss of money or goods owned by the insured or for which the insured is responsible, and reasonable fees incurred in establishing the size of the loss (e.g. auditors or accountants)
Benefits and insured perils:
Business interruption cover
Indemnifies the insured against losses made as a result of not being able to conduct business.
For financial risks, perils might include: (4)
- Failure of 3rd parties specified in the policy (pecuniary loss)
- Dishonest actions by employees (fidelity guarantee)
- Fire at the insured’s own property (business interruption cover)
- Fire at neighbouring premises - causing loss of access to own property (business interruption cover)
Fixed benefit claims arise under: (2)
- personal accident
- health
insurance
Benefits and insured perils:
Personal accident
Benefits are usually specified fixed amounts in the event that an insured party suffers the loss of one or more limbs or another specified injury.
Benefits and insured perils:
Health insurance
Health insurance provides money that can be used for various purposes following a “health event” - usually a specified illness or injury that can be diagnosed.
The amounts paid out are not linked to the cost of treatment (as otherwise, the benefits would have to comply with the Medical Schemes Act).
Whole life insurance
A contract to pay a benefit on the death of the life insured whenever that might occur.
Term assurance
A contract to pay a benefit on the death of the life insured within the term of the contract (chosen at outset).
Endowment Insurance
These are products that pay out on the survival of the life insured until a certain date.
It acts as a savings vehicle, e.g. to provide a lump sum on retirement, or a means of repaying the capital on an interest-only loan.
Immediate annuity
A contract to pay out regular amounts of benefit, provided the life insured is alive at the time of payment. The word “immediate” indicates that the contract starts payments immediately, without a deferred period.
The main purpose of the contract is for the consumer to convert capital into lifetime income.
Deferred annuity
A contract to pay out regular amounts of benefit provided the life insured is alive at the end of the deferred period when payments commence, and subsequently alive at the future dates of payment.
Insurance products may be written on 3 main bases
- Conventional without profits
- With profits
- Unit-linked
Conventional without profits policies insurance contracts
Fully guaranteed benefits and regular premiums.
With profits insurance contracts
A policy where the policyholder has an entitlement to part or all of any future surplus which arises under the contract.
Unit-linked insurance policies
A policy where the benefits are linked directly to the investment performance of a specified fund and characterised by fewer guarantees on benefits and premiums.
