Chapter 8: General insurance products Flashcards
Key features of general insurance contracts
- Short term
- Can have multiple claims
- Claim amounts are generally unknown and can be volatile
- There can be delays in reporting and settling claims
List the 4 generic groups of general insurance products
- Liability
- Property damage
- Financial loss
- Fixed benefit
Products covered under liability insurance
- Employers’ liability
- Product liability
- Public liability
- Motor third party
- Professional indemnity
Products covered under property damage insurance
- Land vehicles
- Marine
- Aircraft
- Residential buildings
- Commercial buildings
- Moveable contents
Products covered under financial loss insurance
- Pecuniary loss (including mortgage indemnity guarantee)
- Fidelity guarantee
- Business interruption
- Cyber insurance
Products covered under fixed benefit insurance
- Personal accident
- Health
- Unemployment
What is the General insurance split?
- Personal lines - contracts sold to individuals, such as residential buildings and contents insurance
- Commercial lines - contracts sold to businesses, such as commercial property, employers’ liability and business interruption insurance.
What is the difference between short- and long-tailed business?
- Short-tailed means that claims are generally reported quickly and settled quickly by the insurer, and
- Long-tailed means that there is a sizeable proportion of total claim payments that take a long time to be reported and / or a long time for the insurer to settle.
Define and give the causes of reporting and settlement delays.
- Reporting delay is the time from the event occurrence through to the time that the insurance company is notified of the event.
This could be due to:
- the time between an event occurring and the conditions emerging e.g. asbestosis
- the time taken for the policyholder to advise the insurer, either because the claim amount is small, or they do not realise they have cause to claim. - Settlement delay is the period between notification to the company and the payment of the claim.
This could be due to:
- initial administrative processing
- establishing whether the insurer is liable
- waiting for a condition to stabilise
- establishing how much should be paid
- possible disputes and court settlements
What is a rating factor?
A rating factor is a factor used to determine the premium rate for a policy, which is measurable in an objective way and relates to the likelihood and/or severity of the risk.
It must therefore, be a risk factor or a proxy for a risk factor or risk factors.
How are profits calculated for General insurance contracts?
Premiums net of reinsurance premiums paid
+ Investment income and gains
- Claims incurred net of reinsurance recoveries
- Expenses and commission
- Tax
= Profit
Claims incurred = claims paid + increase in provisions
Miscellaneous information
Risk Premium = expected claim frequency x expected cost per claim
The riskiness of a class of business will be affected by factors such as:
- whether the class is long- or short-tailed
- sum insured or likely claim amount
- likely claim frequency
- claims volatility
- exposure to accumulations of risk or catastrophes
- volume of contracts sold and hence availability of data and predictability of future assumptions
- availability of and take up of reinsurance for that class of business.
List the different types of reserves / provisions held in General insurance
- Outstanding reported claims reserve
- Incurred but not yet reported reserve
- Unexpired risk reserve
- Catastrophe reserve
- Claims handling expense reserve
Mention the types of assets that general insurance companies will generally hold.
- Plenty of cash for liquidity
- Some fixed-interest bonds to meed fixed liabilities
- Assets to match the term of liabilities, which are predominantly short to medium term
- Assets denominated in both the domestic and overseas currency
- Real assets to meet inflation-linked liabilities and expenses
The investment strategy of a general insurer is constrained by factors such as regulation, the size of the free assets, and the need to be tax efficient
Key risks under general insurance contracts
- Claim frequency, amount, volatility and delays
- Accumulations of risk and catastrophes
- Investment risks.
- Expenses being higher than expected
- Poor persistency, i.e. high lapses and low renewals
- New business volumes too high and hence new business strain, or too low and not enough business over which to spread the overheads
- Credit risk
- Operational risks
Tools to mitigate risks for general insurers
- Reinsurance
- Underwriting
- Diversification across classes of business or geographically
- Monitoring experience
List the reasons for monitoring experience as a general insurer
- To set assumptions for premium rating
- To set assumptions for provisioning and monitor the run-off of claims against expectations
- To assess the profitability of its business and the key components of profitability
- To assess reinsurance requirements and to monitor the adequacy of reinsurance
- To determine an appropriate investment strategy
- To determine capital requirements
- To assist with financial planning and strategy
- To provide management information
- To help with marketing new contracts
Describe the principle of indemnity
The principle of indemnity is to restore the insured to the same financial position after a loss as before the loss
Typically the intention of the benefits is to indemnify the insured, i.e. to compensate the insured for the financial loss as a result of the insured event.
Describe what a peril is
A peril is a type of event that may cause losses, whether man-made or due to natural disaster.
List the perils that a household buildings policy might indemnify a policyholder for
- Fire
- Adverse weather conditions
- Earthquake
- Subsidence
- Impact from vehicles, falling trees
- Explosion
- Damage caused by burst pipes
- Criminal damage
- Other perils depending on where the house is situated, for example, war damage
Discuss liability insurance
Liability insurance provides indemnity where the insured, owing to some form of negligence, is legally liable to pay compensation to a third party.
Any legal expenses relating to such liability are usually also covered.
An illegal act of negligence will often invalidate the cover.
The extent of any legal liability may depend on the prevailing legislation.
The basic benefit provided by liability insurance is an amount to indemnify the policyholder fully against a financial loss.
This benefit may be restricted by:
- a maximum specified amount per claim or per event
- an aggregate maximum per year
- an excess, when the first part of any claim is not paid.
Subject to the details of any reinstatement clause, payment of any benefits may result in a cancellation of cover or the need for a further premium.
Employers’ liability
This insurance indemnifies the insured against the legal liability to compensate an employee or their estate for accidental bodily injury, disease, or death suffered, owing to negligence of the employer, in the course of employment.
Perils covered include:
- Accidents
- Exposure to harmful substances
- Exposure to harmful working conditions
Motor third party liability
This insurance indemnifies the owner of a motor vehicle against compensation payable to third parties for death, personal injury or damage to their property.
Therefore, perils covered include:
- Third party death
- Third party personal injury
- Third party damage of property
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.
The perils covered by this contract will relate to the type of policy, as this type of insurance forms part of many types of insurance policy.
Product liability
This 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, which results from a product fault.
Here the perils depend greatly on the nature of the product being produced, but include:
- faulty design
- faulty manufacture
- faulty packaging
- incorrect or misleading instructions
As with all types of liability insurances, the policy would also cover legal expenses incurred by the insured in respect of claims against them.
List information the company should obtain in deciding whether to offer product liability cover to a customer
- The nature of the particular product
- The general trade of the company
- How the product is used
- Any potentially dangerous components within the product, and how quickly they deteriorate
- The material used for packaging
- Where the product is sold, as some countries are more litigious than others.
Professional indemnity
The insured is indemnified against legal liability resulting from negligence in the provision of a service.
The perils here depend on the profession of the insured.
Property damage insurance
The main characteristic is to indemnify the policyholder.
However, here the indemnity is against loss of, or damage to, material property.
The benefit is often the amount to indemnify the insured against the value of the loss or damage, at the time the incident occurs, subject to any limits or excesses.
Household and commercial buildings property
In respect of these buildings, fire is the principal peril insured against, however polices can also cover other perils such as:
- explosion
- lightning
- theft
- storm
- flood
Damage to the insured property caused by measures taken to put out a fire is also covered.
Moveable property
The policy will define precisely what moveable property is covered by the insurance.
Theft is the major peril for moveable property.
As with buildings insurance, the policy will set out the perils covered, and they will be similar to that of the buildings insurance
Motor property
The perils include:
- Accidental or malicious damage to the insured vehicle
- Fire or theft of the vehicle
This cover is typically provided together with motor third party cover within a single policy, but it can also be provided separately.
Marine property and aviation
The following perils relate specifically to marine hull cover, but similar perils are covered for marine cargo, marine freight and aviation insurance:
- perils of the seas
- fire
- explosion
- jettison
- piracy
Explain the different type of marine cover
Marine hull cover refers to the loss of or damage to the craft
Marine cargo refers to the actual contents of the craft
Marine freight refers to the money payable for shipment of the cargo
Financial loss insurance
The benefits provided is indemnity against financial losses arising from a peril covered by the policy
Pecuniary loss
Pecuniary loss, which includes mortgage indemnity guarantee insurance, protects the insured against bad debts or other failure of a third party.
Mortgage indemnity insurance protects the mortgage lender against the risk that the borrower defaults on the loan and a loss is made by the lender due to the sale of the property not covering the outstanding liability.
Fidelity guarantee insurance
Fidelity guarantee covers the insured against financial losses caused by dishonest actions by its employees.
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.
Business interruption cover
Business interruption cover indemnifies the insured against losses made as a result of not being able to conduct business for various reasons specified in the policy.
For example, fire at the insured’s property or a neighbouring property.
Cyber insurance
Cyber insurance is available to protect against cyber risks.
Cyber insurance can cover pecuniary, fidelity guarantee and business interruption cover losses for a business.
Cyber insurance can provide cover against financial loss arising from an IT security breach, which include:
- the cost of identifying and repairing any breaches
- the cost of buying new computers / hardware
- business interruption losses, while the insured’s systems are down
- consequential losses / compensation payments to customers
- fines imposed by the regulator as a consequence of the attack
- costs associated with the loss of client information
- costs associated with damage to the insured’s reputation
- costs arising from the onward transmission of a virus
- loss of intellectual property
Personal accident insurance
Benefits are usually specified fixed amounts in the event that an insured party suffers the loss of one or more limbs or other specified injury.
This is not indemnity insurance because it is not possible to quantify the value of the loss of an arm for example.
The perils are any form of accident that results in the loss of limbs or other specified injury.
Key differences between in cover between group personal accident insurance and employers’ liability insurance.
- Group personal accident claims are of fixed amounts, whereas the size of employers’ liability claims will vary from claim to claim.
- EL is often subject to legal minimum level s of cover and is compulsory in many countries. GPA cover is nearly always optional, with the level of cover chosen by the employer.
- Claims under EL will be due to the employers’ negligence or negligence due to other employees. GPA claims are for any accident, regardless of fault.
- EL will only pay out for incidents arising from employment. GPA will (generally) pay out for any accidents regardless of whether they arose from employment
- Accidents during employment could therefore give rise on either EL or GPA.
Health insurance
Health insurance, in its narrowest sense, provides money for medical treatment.
As such it is an indemnity insurance, however only part of the cost may be provided, or benefits may be a fixed amount regardless of the actual cost of treatment, and this type of health insurance can then be included with fixed benefit insurances.
Hospital expense plans also exist, which pay a fixed amount for each day the patient is treated in hospital as an in-patient.
Health insurance cover is subject to the primary peril of the need for treatment in a hospital.
In practice, health insurance is an umbrella term used to describe the four main types of cover:
- income protection
- critical illness
- long-term care
- private medical insurance
Unemployment insurance
This provides a lump sum or an income stream, usually of no more than a year’s duration, in the event of a policyholder being made redundant.
Its purpose is to provide additional funds to maintain the policyholder’s lifestyle and service any debts for a short period while new employment is sought.
