IF1.7 Indemnity Flashcards
Define Indemnity
financial compensation sufficient to place the insured in the same financial position after a loss as they enjoyed immediately before the loss occured
Define benefit policy
policies providing fixed benefits where there is no way to place a price of the loss.
Examples of benefit policies
- personal accident
- sickness
- critical illness
- payment protection indemnity
- hospital cash plans
- permanent health
- elements of travel insurance
What are the 4 ways to indemnify the insured
- cash settlement
- repair
- replacement
- reinstatement
negatives of cash settlement
high chance of fraud
alternative to cash settlement
vouchers for stores where the insurers can negotiate discounts
If the insured requests a cash settlement when the insurer was going to replace the item then…
the insurer can only pay the amount the would’ve paid to the retailer (even if this was a discount sum)
When is replacement used?
when the object is a total loss e.g. for TV that was smashed
advantages of repair
lower cost than the insured could get due to the negotiation power of the company
negotiation power
the insured will go to approved or recommended repairers where the insurer will get a discounting rate due to providing them with a steady flow of business.
benefits of replacement
-can reduce fraud
-insurers can negotiate discounts with retailers
- customer experience is improved (they don’t have to deal with buying new things)
What is reinstatement know as?
New for Old
What is reinstatement
restoring or rebuilding property or machinery which has been damaged by an insured peril. The reinstatement return it to the same condition it was before no matter the cost to the insurer (they loose the protection of the maximum sum insured).
Sum insured
The maximum amount the insurer will pay in the event of a total loss
Indemnity in property insurance
cost of replacement - wear and tear
Indemnity in liability insurance
The amount they are liable for (up to the limit of indemnity)
If two personal accident policies are taken out what will the claim result be?
the sum of the two policies (they’re benefit policies)
Agreed value policy
the value is agreed directly between the insurer and the insured based on a valuation.
Property: Basic cover
Indemnity is calculated as the cost of repair at the time of loss
Property: Reinstatement Memorandum
The insurance company predicts the costs of reinstatement when the claim is settled (in the future)
There is a 15% margin for error.
Property: day one reinstatement
The reinstatement value is the amount reinstatement would cost today plus and automatic uplift for inflation. No margin for error.
Indemnity for Household good cover
either basic i.e. the cost of replacing the items - wear and tear deduction or New for Old cover.
Indemnity for Manufacturers stock
The cost of the raw materials plus any labour incurred producing the finished stock
Indemnity for Wholesalers and retailers
the cost of replacing stock at the time of loss plus transport and handling costs (or simply the profit they would’ve made)
Betterment contribution
A deduction for wear and tear when replace items
When are first loss policies used
When total loss of subject matter is unlikely to arise
What is a first loss policy
The insured can request their policy has a sum insured less than the full value, the value is based on the insureds estimate of the maximum likely to be lost in any one single event
Negatives of first loss policies
it only reduces the premium slightly as the insurer would have taken the factor of very low risk into account. There is only a slight reduction in their maximum exposure.
What are the limiting factors of indemnity
- Sum insured
- excess
- Average conditon
- inner limits
If the cost > Sum insured then…
The insured must pay the extra
What is an inner limit
A single item limit that is x% of the total sum insured
Underinsurance
If the insured understates the value of the subject matter of the insurance
When is the average condition applied
When the insured underinsured and there is a partial loss
Formula to calculate the claim payment via the average condition
sum insured/actual sum insured x loss
Indemnity of Farming Stock
local market price (even though that give potential profits)
excess
an amount that is deducted from each claim and is paid for by the insure
purpose of a voluntary excess
to reduce the premium
Deductible
A large excess
Time period of one event with a deductible
72 hours
Benefits of excesses
reduces small claims, reducing admin costs
Indemnity for machinery: basic
price of second hand machinery + carriage and installation
(otherwise new minus wear and tear)
enterprise Act 2016
policyholders can claim damages in the event of a late payment from insurers.
claims have to be paid in ‘reasonable time’: depends on the relevant circumstances e.g. type of insurance, size and complexity of claim, compliance & factors outside of control.
loss had to be foreseeable by the insurer.
Special conditions of average
if the value fluctuates then average will not be applied. e.g. gain in a farmyard.
Two conditions of average
if stock may be in two possible locations .
