Chapter 7 - E Flashcards
What does the premium that an insured pays represent?
The insured’s contribution to the ‘common pool’
This contribution must reflect the degree of risk brought to the pool.
What two factors are used to measure different levels of risk in the premium calculation?
- Frequency of loss
- Severity of loss
What is the law of large numbers in the context of insurance?
It allows insurers to determine a more accurate premium chargeable due to a significant amount of data.
What are the components of premium calculation?
- Premium rate
- Premium base
How is the premium rate typically expressed?
As a rate per cent (price per £100 insured) or as a rate per mille (rate per £1,000 insured).
What is the premium base for employers’ liability insurance?
The payroll of the insured, often broken down into different categories of work.
In products/public liability insurance, what is the basis for premium calculation?
Turnover.
What is professional indemnity insurance rated on?
Fees earned.
True or False: The premium base is always a factual figure at the start of the insurance period.
False.
What is the purpose of submitting a declaration at the end of the insurance year?
To adjust the premium based on actual figures compared to estimates.
What is ‘open cover’ in marine cargo insurance?
A type of insurance contract where premiums are paid in stages as goods are shipped.
What can following market insurers do regarding the premium rate set by the leading insurer?
They can choose to request a different rate, usually higher.
List the four obligations of an intermediary according to BIPAR principles.
- Specify the demands and needs of the client
- Review and advise on market structures
- Explain options for multiple insurer placement
- Keep the client informed of progress
What are some other components that should be considered in premium calculations?
- Operational costs
- Reinsurance costs
- Profit margin
- Contribution to claims reserves
- Taxes
How can operational costs affect premium calculations?
Certain types of business might be more cost-heavy, impacting the final premium.
What does the profit margin consider in premium calculations?
All additional expenses incurred in writing the risk.
What is the importance of building up claims reserves?
To prepare for potential catastrophe losses.
How can taxes impact an insurer’s net income?
Ignoring tax costs can lead to substantial reductions in perceived net income.
Fill in the blank: The premium for an oil rig would be ______ compared to a private house.
substantially higher.
Fire brigade in Germany
a type of tax and are charged to insurers as a
deduction from their premium. If an insurer’s premium is already low and it loses another
8-10% on various taxes, it might make the difference between profit and loss.
