IF1.7 Indemnity

Question 1

Define Indemnity

Answer 1

financial compensation sufficient to place the insured in the same financial position after a loss as they enjoyed immediately before the loss occured

Question 2

Define benefit policy

Answer 2

policies providing fixed benefits where there is no way to place a price of the loss.

Question 3

Examples of benefit policies

Answer 3

1. personal accident
2. sickness
3. critical illness
4. payment protection indemnity
5. hospital cash plans
6. permanent health
7. elements of travel insurance

Question 4

What are the 4 ways to indemnify the insured

Answer 4

1. cash settlement
2. repair
3. replacement
4. reinstatement

Question 5

negatives of cash settlement

Answer 5

high chance of fraud

Question 6

alternative to cash settlement

Answer 6

vouchers for stores where the insurers can negotiate discounts

Question 7

If the insured requests a cash settlement when the insurer was going to replace the item then…

Answer 7

the insurer can only pay the amount the would’ve paid to the retailer (even if this was a discount sum)

Question 8

When is replacement used?

Answer 8

when the object is a total loss e.g. for TV that was smashed

Question 9

advantages of repair

Answer 9

lower cost than the insured could get due to the negotiation power of the company

Question 10

negotiation power

Answer 10

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.

Question 11

benefits of replacement

Answer 11

-can reduce fraud
-insurers can negotiate discounts with retailers
- customer experience is improved (they don’t have to deal with buying new things)

Question 12

What is reinstatement know as?

Answer 12

New for Old

Question 13

What is reinstatement

Answer 13

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).

Question 14

Sum insured

Answer 14

The maximum amount the insurer will pay in the event of a total loss

Question 15

Indemnity in property insurance

Answer 15

cost of replacement - wear and tear

Question 16

Indemnity in liability insurance

Answer 16

The amount they are liable for (up to the limit of indemnity)

Question 17

If two personal accident policies are taken out what will the claim result be?

Answer 17

the sum of the two policies (they’re benefit policies)

Question 18

Agreed value policy

Answer 18

the value is agreed directly between the insurer and the insured based on a valuation.

Question 19

Property: Basic cover

Answer 19

Indemnity is calculated as the cost of repair at the time of loss

Question 20

Property: Reinstatement Memorandum

Answer 20

The insurance company predicts the costs of reinstatement when the claim is settled (in the future)
There is a 15% margin for error.

Question 21

Property: day one reinstatement

Answer 21

The reinstatement value is the amount reinstatement would cost today plus and automatic uplift for inflation. No margin for error.

Question 22

Indemnity for Household good cover

Answer 22

either basic i.e. the cost of replacing the items - wear and tear deduction or New for Old cover.

Question 23

Indemnity for Manufacturers stock

Answer 23

The cost of the raw materials plus any labour incurred producing the finished stock

Question 24

Indemnity for Wholesalers and retailers

Answer 24

the cost of replacing stock at the time of loss plus transport and handling costs (or simply the profit they would’ve made)

Question 25

Betterment contribution

Answer 25

A deduction for wear and tear when replace items

Question 26

When are first loss policies used

Answer 26

When total loss of subject matter is unlikely to arise

Question 27

What is a first loss policy

Answer 27

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

Question 28

Negatives of first loss policies

Answer 28

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.

Question 29

What are the limiting factors of indemnity

Answer 29

1. Sum insured
2. excess
3. Average conditon
4. inner limits

Question 30

If the cost > Sum insured then…

Answer 30

The insured must pay the extra

Question 31

What is an inner limit

Answer 31

A single item limit that is x% of the total sum insured

Question 32

Underinsurance

Answer 32

If the insured understates the value of the subject matter of the insurance

Question 33

When is the average condition applied

Answer 33

When the insured underinsured and there is a partial loss

Question 34

Formula to calculate the claim payment via the average condition

Answer 34

sum insured/actual sum insured x loss

Question 35

Indemnity of Farming Stock

Answer 35

local market price (even though that give potential profits)

Question 36

excess

Answer 36

an amount that is deducted from each claim and is paid for by the insure

Question 37

purpose of a voluntary excess

Answer 37

to reduce the premium

Question 38

Deductible

Answer 38

A large excess

Question 39

Time period of one event with a deductible

Answer 39

72 hours

Question 40

Benefits of excesses

Answer 40

reduces small claims, reducing admin costs

Question 41

Indemnity for machinery: basic

Answer 41

price of second hand machinery + carriage and installation

(otherwise new minus wear and tear)

Question 42

enterprise Act 2016

Answer 42

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.

Question 43

Special conditions of average

Answer 43

if the value fluctuates then average will not be applied. e.g. gain in a farmyard.

Question 44

Two conditions of average

Answer 44

if stock may be in two possible locations .