Chapter 8: General insurance products Flashcards
What is general insurance and what are the key characteristics?
General insurance is any type of insurance that is not life insurance.
Contract of indemnity i.e. aims to reimburse any losses occurring.
Key features are:
- Short term (single year)
- Can be multiple claims
- Claim amounts generally known and very volatile
- Delays in reporting and settling claims
Can be split into:
- Personal lines-sold to individuals
- Commercial lines-sold to businesses
Short- vs long-tailed business:
- Short-tailed- claims reported quickly & settled quickly by insurer
- Long-tailed- big proportion of total claim payments that take long time to be reported and/or long time for insurer to settle
- Can affect level of risk and investment strategy used to match liabilities
Discuss the underwriting, contract design, the process of setting premium rates, provisioning and NBS under general insurance contracts.
Underwriting:
- Decides how risky an applicant is and what premium should be charged
- Rating factor—factor used to determine prem rate for policy, which is measurable in objective way and relates to likelihood and/or severity of risk.
- Key rating factors for car insurance are age and car type
Contract Design:
- Key design consideration to general insurance company is profitability
- Profits made up of:
+ Prems net reinsurance prems paid
+ Investment income & gains
- Claims incurred net reinsurance recoveries
- Expenses & commission
- Tax
= Profit
- Claims incurred= claims paid + increase in provisions
Setting premiums:
- Risk prem/theoretical cost= expected claim frq x expected cost per claim
- If company has reasonable quantity of past data – can fit distribution to claim frequency and claim amount data—from this expected values can be estimated
- Important to remove any distorting feature from past data—trends, one-off events or changes in cover provides
- Necessary to project claims data
- Then gross premium calculated allowing for commission and other expenses, profit, investment income and cost of reinsurance
Provisioning:
- Insurer required by regulation to establish provisions
- Reserves include:
Outstanding reported claims reserve
Incurred but not reported reserve
Unexpired risk reserve (claims not yet happened)
Catastrophe reserve
Claims handling expense reserve
New business strain:
- Writing general insurance requires capital to cover effects of new business strain
- Capital needed depends on
Volume of business written
Risk attached
Discuss how the investment strategy is chosen for a general insurance contract.
Investment strategy:
- Consider characteristics of its liabilities when determining
- Some general insurance liabilities are fixed
- Most liabilities will be settled in prices applicable at time of settlement—element of inflation and inflation depends on class and peril
- This means holding:
Cash for liquidity
Fixed-interest bonds to meet fixed liabilities
Assets to match term of liabilities (mostly short to medium term)
Assets denominated in both domestic and overseas currency
Real assets (index-linked bonds, equity & property) to meet inflation-linked liabilities and expenses
Volatile nature of GI business and need for liquidity will limit appetite for property and equity
- Strategy is constrained by regulation, size of free assets and the need to be tax efficient
What are the key risks under general insurance business and how is this risk managed and monitored?
Key risks under general insurance:
- Claim frq, amount, volatility and delays
- Accumulation of risk (by class of business and geographically) and catastrophe
- Investment risk
- Higher expenses than expected
- Poor persistency ( high lapses and low renewals)
- New business strain—new business volume too high OR too low and not enough business
- Credit risk
- Operational risk
Risk management:
- Reinsurance, underwriting, diversification across classes of business and geographically and monitoring experience
Monitoring experience:
- GI will typically monitor claims, expenses, lapses and renewals, new business volumes and mix, investment returns, reinsurance performance and profitability
What are the main types of liability insurance?
Liability insurance:
- Provides indemnity where insured, owning to some form of negligence, is legally liable to pay compensation to third party
- May be an excess and/or max level of cover provided by insurer
Main types of liability insurance:
- Employers’ liability
o Indemnifies insured against legal liability to compensate an employee or their estate for accidental bodily injury, disease or death suffered, owing to negligence of employer, during employment.
o Perils include exposure to harmful substances and harmful working conditions
- Motor third party liability
o Indemnifies owner of motor vehicle against compensation payable to third parties for death, personal injury or damage to their property.
o Perils include motor accidents caused by insured
o This cover is compulsory in most countries
- Public liability
o Indemnified against legal liability for death of, or bodily injury to, a third party or for damage to property, other than those liabilities covered by other liability insurance
- Product liability
o Indemnifies the insured against legal liability for death of, or bodily injury to, third party or for damage to property belonging to third party, which results from product fault.
o Perils - faulty design, manufacture, packaging and misleading instructions
- Professional indemnity
o Indemnifies insured against legal liability resulting from negligence in provision of a service e.g. unsatisfactory medical treatment or incorrect advice from actuary, solicitor etc.
What are the main types of property damage insurance?
Property damage insurance:
- Indemnifies the insured against loss of, or damage to, their own material property
- May be an excess and/or max level of cover provided by insurer
Main types of property damage insurance:
- Residential and commercial building
o perils include fire, explosion, lighting, theft, storm, flood, damage done to put out fire.
- Moveable property (contents)
o major peril is theft
- Motor property
o perils include accidental or malicious damage to insure vehicle, fire and theft
- Marine property
o Perils relate to marine hull cover—loss of or damage to craft
o perils include perils at sea, fire, jettison, piracy
o Marine cargo refers to actual contents of craft
o Marine freight refers to money payable for shipment of cargo
- Aviation property
o Same perils to marine craft but air based
What are the main types of property damage insurance?
Property damage insurance:
- Indemnifies the insured against loss of, or damage to, their own material property
- May be an excess and/or max level of cover provided by insurer
Main types of property damage insurance:
- Residential and commercial building
o perils include fire, explosion, lighting, theft, storm, flood, damage done to put out fire.
- Moveable property (contents)
o major peril is theft
- Motor property
o perils include accidental or malicious damage to insure vehicle, fire and theft
- Marine property
o Perils relate to marine hull cover—loss of or damage to craft
o perils include perils at sea, fire, jettison, piracy
o Marine cargo refers to actual contents of craft
o Marine freight refers to money payable for shipment of cargo
- Aviation property
o Same perils to marine craft but air based
What are the main types of financial loss insurance?
Financial loss insurance:
- Indemnity against financial losses arising from a peril covered by policy
- May be an excess and/or max level of cover provided by insurer
Main types of financial loss insurance:
- Pecuniary loss
o Perils include bad debts or failure of third parties, includes mortgage indemnity guarantee insurance
- Fidelity guarantee insurance
o Covers insured against financial losses caused by dishonest actions by employees e.g. fraud and embezzlement
- Business interruption cover
o Indemnifies insured against losses made as a result of not being able to conduct business for reason specified in policy
- Cyber insurance
o Protects against cyber risk
o Can cover pecuniary, fidelity guarantee and business interruption cover losses
o Perils include hacking, phishing, worm attacks, viruses
o Antivirus software and firewalls can reduce likelihood
What are the main types of fixed benefit insurance?
Fixed benefits:
- Personal accident insurance
o Benefits specifies fixed amount in event that insured party suffers loss or one or more limbs or other specified injury.
o Cover can be offered on group basis
- Health insurance
o Provide money for medical treatment
o Income protection, critical illness, long-term care and private medical insurance
- Unemployment insurance
o Provides lump sum or income stream, for no more than a year, in the case of policyholder being made redundant
o Purpose is to provide funds to maintain the policyholder’s lifestyle and service any debts for a short period while employment sought
