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Reserving paper > Chapter 2: Insurance Products - Background > Flashcards

Chapter 2: Insurance Products - Background Flashcards

1
Q

3 Conditions for a risk to be insurable

A
  • 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.
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2
Q

6 Criteria of insurable risk

Mnemonic - MUD PIS

A
  • 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.
M - Moral hazard
U - Upper limit of liability
D - Data availability i.e. likelihood and size of claims
P - Pooling of similar risks
I - Independence of risks
S - small probability of occurrence
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3
Q

Uberrima fides

A

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.

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4
Q

3 Reasons for a Nil claim

A
  • 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.
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5
Q

principle of average

A

… 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.

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6
Q

First loss

A

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.

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7
Q

Subrogation

A

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.

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8
Q

Discovery period

A

A time limit on the period within which claims must be reported.

(usually defined in policy wording or legislative precedent)

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9
Q

Underwriting

A

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.
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10
Q

The policy document

A

Sets out the terms and conditions under which an insurer is liable to pay insurance claims in specific circumstances.

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11
Q

A schedule (on a policy document)

A

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

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12
Q

7 Common items in a schedule (on a policy document)

A
  • 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
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13
Q

Exclusions

A

Clauses in a policy that limit the circumstances in which a claim may be made

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14
Q

4 Examples of common exclusion

A
  • self-inflicted injury
  • dangerous pastimes
  • loss resulting from illegal activity by the policyholder, eg accident while drunk-driving
  • war, terrorism, civil riot

some more examples:

nuclear or radio-active risks
earthquakes
unseaworthiness of vessels
loss of money and documents

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15
Q

Exclusions are used to avoid payment by the insurer in 4 situations:

A
  • 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
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16
Q

SASRIA

A

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.

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17
Q

4 Types of general insurance cover

A
  • liability
  • property damage
  • financial loss
  • fixed benefits
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18
Q

Liability insurance

A

Liability insurance provides indemnity where the insured is legally liable to pay compensation to a 3rd party.

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19
Q

3 Examples of liability insurance

A
  • Employer’s liability
  • Motor third party liability
  • Product liability
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20
Q

Employers’ liability

A

indemnifies the employer against compensation
… payable to employees for losses that they suffer
… as a result of the negligence of the employer.

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21
Q

Motor 3rd party liability

A

indemnifies the owner of a motor vehicle against compensation
… payable to 3rd parties
… for personal injury or damage to their property

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22
Q

Product liability

A

Indemnifies a manufacturer against compensation
… to a 3rd party for losses that they suffer
… as a result of a product fault.

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23
Q

Property damage insurance

A

Provides indemnity to the insured for loss of, or damage to, the policyholder’s own property.

24
Q

3 Examples of property damage insurance

A
  • motor insurance
  • buildings insurance
  • contents insurance
25
Q

Financial loss insurance

A

Indemnifies the insured against financial losses arising from certain causes.

26
Q

2 Examples of financial loss insurance

A
  • Creditor insurance

- Business interruption cover

27
Q

Creditor insurance

A

policy will make regular loan repayments if the policyholder becomes disabled (so that they cannot work) or otherwise unemployed.

28
Q

Business interruption cover

A

policy will compensate the policyholder for not being able to conduct their business,
eg as a result of a fire in the building.

29
Q

Fixed benefit insurance

A

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.
30
Q

“Personal lines business”

A

Insurance products sold to individuals.

31
Q

“Commercial lines business”

A

Insurance products sold to businesses.

32
Q

6 Main feature “headings” of insurance products

A
  • Benefits
  • Insured perils
  • Basis for cover
  • Measures of exposure to which premiums are related
  • Claim characteristics
  • Risk factors and rating factors
33
Q

Peril

A

A type of event that may cause losses (eg theft or flood).

34
Q

3 types of Basis for cover

A
  • losses-occuring, or
  • claims-made
    policies
  • risks-attaching basis
35
Q

Losses-occurring policy

A

Policy providing cover for losses occurring in the defined period no matter when they are reported.

36
Q

Claims-made policy

A

Covers all claims reported to an insurer within the policy period, irrespective of when they occurred.

37
Q

Exposure measure

A

An indication of the level of risk a policy presents to the insurer.

38
Q

Pure risk premium

A

The premium required to cover the expected claim amount only.
No allowance is made for expenses or profit.

39
Q

Measures of exposure

A

Measures that give an indication of how much risk there is within each insurance policy.

40
Q

2 Key criteria of measures of exposure

A

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

41
Q

3 items that need to be confirmed before a claim can be settled:

A
  • whether or not there has been a loss
  • whether or not the insured is liable
  • the amount of the loss
42
Q

Claim characteristics

A

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.

43
Q

Risk factors

A

Any factors that have a bearing on the amount of risk.

44
Q

Rating factors

A

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)
45
Q

Underwriting factors

A

Rating factors, together with subjective factors, that cannot be measured, but will still be taken into account when setting premiums / policy conditions.

46
Q

10 Factors that affect the level of risk and uncertainty of a class of business

A

<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
47
Q

Solvency capital

A

Capital over and above the insurer’s technical reserves.

48
Q

What is meant by an exposure measure being “practical”

A

The measure should be

  • objectively measurable
  • easily obtainable,
  • verifiable
  • not open to manipulation.
49
Q

Moral hazard

A

Moral hazard refers to the action of a party who behaves differently from the way that they would behave if they were fully exposed to the circumstances of that action.

The party behaves inappropriately or less carefully than they would otherwise, leaving the organisation to bear some of the consequences of the action.

Moral hazard is related to information asymmetry, with the party causing the action generally having more information than the organisation that bears the consequences.

50
Q

List the exclusions that are likely to be applied on a private motor policy.

A

certain specified uses, eg for business (unless explicitly allowed), racing
depreciation, wear and tear, or damage to car tyres
where there was an element of illegality, eg the driver did not hold a driving licence or was under the influence of alcohol or drugs
where the insured did not take due care, eg left the keys in the ignition
insured’s personal accident benefits where the insured is very old
losses arising in consequence of earthquakes, war, riot or civil commotion

51
Q

List the types of cover a small retailer might require as part of a ‘package policy’

A

Other than motor, which is not usually included in ‘package policies’, a small retailer might require cover to: 
compensate employees for accidents occurring due to negligence of the employer (employers’ liability and personal accident)
 
compensate third parties, eg customers, for accidents occurring in the shop / on the shop premises (public liability)
protect against damage to the shop (commercial buildings cover)
compensate for lost revenues should the shop be unable to trade (business interruption cover)
protect against loss of or damage to stocks while in the shop (moveable property (contents) cover)
protect against loss of or damage to stocks while in transit (goods in transit cover)
protect against bad debts by suppliers of goods / materials (credit insurance)
protect against bad debt by customers buying goods on trade credit (credit insurance)
protect against financial losses due to dishonest actions of employees (fidelity guarantee insurance)
pay any legal expenses as a result of legal proceeding being initiated against the shop or the shop needing to initiate legal proceedings against another party (legal expenses cover).

52
Q

If you were the owner and manager of a general insurance company, suggest what you would do to try to reduce the fraudulent claims against you.

A

making the policy wording as tight as possible, and reviewing it regularly in the light of market and judicial changes
devising contracts which minimise the fraud risks, eg minimum and indexed sums insured for household contents policies
working together with other insurers and industry bodies to try to identify and punish persistent offenders
random spot checks on claims, even smaller ones
having repairs done by a small number of approved firms (rather than at the choice of the claimant)
insisting on the police being involved before paying out on a theft claim
publicity to advise against it, eg ‘It’s a crime to …’ and ‘Look what happened to this fraudster …’.

53
Q

Practice Q1 - Reasons for applying exclusions

A

to avoid payment by the insurer in situations where: –

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
where the risk cannot be reliably estimated by the insurer, regardless of whether or not the policyholder has better information
when the probability of loss is very high
the risk is covered by a third party such as the government
to limit the scope of the policy to make it more appropriate for a particular target market
to reduce the premium for competitive reasons
to reduce the risk of moral hazard and fraud.

54
Q

the difference between a risk factor and a rating factor

A

A risk factor is a factor that affects the level of risk for a particular policy.
A rating factor is a factor used in the rating process, either because it is a measurable risk factor or because it is a proxy for a risk factor.

55
Q

why rating factors are needed

A

Rating factors are needed because different policies have different levels of risk and because the exposure measure is rarely good enough by itself to gauge the level of risk

56
Q

the difference between a rating factor and an underwriting factor

A

An underwriting factor is one that is used to determine the premium, terms and conditions for a policy. It may be a rating factor or some other risk factor that is accounted for in a subjective manner by the underwriter. Remember that rating factors must be measurable, verifiable, etc.

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