Diploma P10 Flashcards
General Insurance
List any five (5) Reinsurance Companies with their full names as recognised by the Regulator.
Direct insurance companies
Lloyd’s syndicates
Captive insurance companies
State insurance companies
Reinsurance pools
Reinsurance companies
Enumerate five (5) main points why we have State Regulation in Insurance?
Maintain solvency - To ensure insurance companies maintain reasonable level of fund/capital and withstand “shocks” or unforeseen losses without going out of business.
Equity - Complex form of contract is insurance, it is then necessary and essential that control exist for protection of all parties involved particularly policyholders.
Competence - This is to ensure those that deals in such transaction are competent persons and able to fulfil all promises/pledges.
Insurable interest - To ensure insurable interest exist at the appropriate level/times to avoid element of gambling which comes under separate regulations.
Provision of certain form of insurance - Government needs to regulate some forms and in fact all compulsory insurances in line with the laws.
National insurance - Insurers formally authorized to provide social insurance that was before exclusive provision of government such as unemployment, sickness, pensions, widow benefits and others hence state regulation.
Define contribution?
Contribution is the right of an insurer to call upon others similarly but not necessarily equally liable to the same insured to share the cost of an indemnity payment
State any five (5) conditions that must be present for contribution to arise? (5 marks)
two or more policies of insurance must exist.
the policies cover a common insurable interest
the policies cover a common peril giving rise to the loss.
the policies cover a common subject matter
Each policy must be liable for the loss.
NB policies do not have to cover the same interests or perils or subject matter or insurance provided that there is an overlap between one policy and another. For example, a policy covering the insured stock in one premise will also contribute with one covering its stock in all its premises
Define the term warranty?
A warrant is defined as an undertaking by the insured that a certain state of affairs will or will not, continue, or that something shall or shall not be done, throughout the duration of the contract.
What is the legal position after a breach of a warranty.
Any breach of a warranty allows the insurer to avoid the contract.
Conditions can be expressed in the policy or implied. These conditions are important, otherwise they would not be there and a breach of any of these conditions will be serious. State the three (3) groups that these conditions fall into and briefly explain with examples the stated groups.
-conditions precedent to the contract: these are conditions which must be fulfilled prior to the formation of the contract itself e.g. the implied conditions fall into this category. If they are not complied with, then there is doubt as to the validity of the entire contract.
-conditions subsequent to the contract: these are conditions which have to be complied with once the contract is in force e.g. any condition relating to the adjustment of premiums, or notification of alterations to the risk, e.t.c.
-conditions precedent to liability: these conditions relate to claims, and must be complied with if there is to be a valid claim e.g. prompt notification of claims in the proper manner.
Example Motor Insurance
What does an “average clause” provide for in an insurance policy?
Average clause, in an insurance policy, provides that where the sum insured is less than full value, the insured will be considered their own insurer for the uninsured part of the risk (2 marks) and the claim payment for any loss will be
scaled down proportionately. (2 marks)
State any six (6) circumstances where a person insured under a property policy may receive less than a full indemnity in the event of a valid loss?
Example: John insures his house for $200,000.
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Inadequate Sum Insured:
- Circumstance: John’s house actually costs $300,000 to rebuild after a fire, but he only insured it for $200,000.
- Outcome: Since John didn’t insure his house for its full value, the insurance company may only pay him a proportionate amount of the loss, leaving him with less than the full amount needed to rebuild.
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Inadequate Limit of Indemnity:
- Circumstance: John’s insurance policy has a limit of indemnity of $150,000 for fire damage, but the actual damage amounts to $180,000.
- Outcome: Even though John’s sum insured might be enough, the policy’s limit of indemnity isn’t sufficient to cover the entire loss. Thus, he receives less than the full amount needed to repair the damage.
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Operation of Another Policy Limit:
- Circumstance: John has two insurance policies covering his house, each with a limit of $100,000.
- Outcome: In the event of a loss, each insurance company may only pay up to their policy limit. So, if John incurs a loss of $150,000, he’ll only receive $100,000 from each insurance company, leaving him short of the full amount needed.
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Operation of an Average Clause:
- Circumstance: John’s insurance policy contains an average clause, and his house suffers damage valued at $200,000.
- Outcome: If the insurance company determines that John’s sum insured is only 50% of the actual value of his house, they may only pay him 50% of the loss, which would be $100,000. So, John receives less than the full amount of the loss.
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Operation of Excess/Deductible:
- Circumstance: John’s insurance policy has a $1,000 deductible, and his house suffers damage amounting to $5,000.
- Outcome: Since John has to pay the deductible out of pocket before the insurance kicks in, he only receives $4,000 from the insurance company, leaving him with less than the full amount of the loss.
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Operation of Franchise:
- Circumstance: John’s insurance policy has a franchise clause that states the insurance company won’t pay for losses below $10,000.
- Outcome: If John’s loss amounts to $8,000, the insurance company won’t pay anything because it falls below the franchise threshold. Thus, John receives less than the full indemnity for his loss.
In each of these circumstances, John ends up receiving less than the full indemnity he expected from his insurance policy due to various policy terms or coverage limitations.
What objectives are aimed to be addressed by having a survey of a risk carried out for a risk that a large claim had occurred on previously?
The objectives are to:
- identify specific problems which affected the way the loss occurred;
- how it was dealt with;
- with a view to eliminating that cause of loss
- minimizing damage should the event recur.
- Recommend specific conditions and warranties
Explain the following:
I. Indemnity period
II. maximum indemnity period
Indemnity Period: is the period beginning when the damage occurs and ending when the results of the business cease to be affected by the damage but not exceeding the maximum indemnity period as shown in the schedule. (2 marks)
Maximum Indemnity Period- is the theoretical maximum foreseeable period of business interruption following a fire as calculated by the insured. (2 marks)
Describe any six (6) factors that will be considered for setting the maximum indemnity period.
- consider damage at worst time for the largest assessed reinstatement seasonal issued to be considered;
- reinstatement time for building including planning, rebuilding ease of transfer to other sites;
- reinstatement time for machinery including ordering time, ease of transfer of production;
- any specialist machinery;
- how long would it take to replace stock what buffer stock is kept?
- is there another suitable facility in the vicinity from which it could operate temporarily?
In one sentence, explain the term “reinsurance”.
The term “reinsurance” is used to describe a contract between an insurer and reinsurer whereby the insurer cedes parts or all of the risks insured to the reinsurer.
Explain any two (2) scenario with examples when it is the appropriate times for an insurer to use facultative reinsurance.
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When Treaty Capacity has been Filled:
- Scenario: Imagine an insurance company has a treaty agreement with a reinsurer that specifies a maximum limit of $10 million per policy. However, they receive an application for a policy with a sum insured of $15 million.
- Example: A construction company wants to insure a high-rise building worth $20 million. Since the sum insured exceeds the treaty limit, the insurer can’t cover the entire risk under their existing treaty. In this case, they would use facultative reinsurance to cover the excess amount above the treaty limit, seeking coverage for the additional $5 million from a facultative reinsurer.
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For Extra-Hazardous Risks or Unusual Kind of Risk:
- Scenario: Consider an insurance company that specializes in insuring commercial properties but receives an application for a policy covering a nuclear power plant.
- Example: An energy company wants to insure its nuclear power plant against the risk of a meltdown. This type of risk is highly unusual and extraordinarily hazardous, falling outside the scope of the insurer’s typical treaty agreements. In this situation, the insurer would use facultative reinsurance to transfer the risk to a reinsurer who has the expertise and capacity to handle such unique and high-risk policies.
The scenario when it is appropriate for an insurer to use facultative reinsurance are when :
treaty capacity has been filled that is when the sum insured exceeds the treaty limit;
when risks to be reinsured falls outside the scope of the treaty;
the risk is outside the terms of the treaty;
for extra-hazardous risks
the risk is of an unusual kind.
the risk may be of such nature that the re-insured may not want to cede to the treaty;
for specialist class of business
Differentiate between captives and self-insurance. (6 marks)
A captive: is an insurance company owned by its parent company (generally not an insurance company, but for example a large industrial or commercial organisation set up and managed in one of the low tax environment. The Captives accepts risks from its parent company for a premium, which it invests to meet any future losses. A large buyer of insurance may want to remove itself from the conventional spreading of loss, with its associated pricing spread, and have the insurance risk considered entirely on the basis of its own claims experience.
Self-insurance is the most basic and the most frequently used form of ART. It is a process by which a public body self-insures and retain some risks which would have otherwise cede or transfer to the insurer. The reinsurance buyer, when reviewing what has been bought, may feel that the reinsurance purchase has reduced company profit. This feeling may arise either because no claims have occurred or because the levels of claims have been predictable over a period, and that claims experience might be expected to continue into the future. The decision to self-insure will reduce cash flow. It should be noted that self-insurance should be accompanied by an emphasis on risk management and more control over those claims, which do occur.
