Insurance business Flashcards
Upper limit of insurance domain
Uninsurability:
- technical reasons: natural catastrophes, interruption insurance
- legal reasons: intentional acts
Lower limit of insurance domain
Risk management, auto-insurance, captives, and other techniques of alternative risk transfer
Left border of insurance domain
Social insurance and social security
Right border of insurance domain
Other financial activities: banking, investment
Insurance technique definition
The compensation of the detrimental effects of fate upon man’s patrimony by mutualisation organised according to the rules of statistics
Key issue to insurer
Predict losses
“the inversion of the production cycle”
Calculate probabilities and technical provisions to fulfil future debts
Two major models of insurance business
- Mutual insurance associations: non-profit, variable contributions
- Fixed premium insurance: for profit, less vulnerable by using financial market
Other models of insurance business
- Captives
- Direct writing company
- Pools
- Bancassurance
- Assurfinance
Principles of insurability
- Mutualisation and statistics
- Dispersion of the risk
- Frequency of the risk
- Homogeneity of risk pools
- Risk selection and premium setting
- Prevention
- Reinsurance
- Law of large numbers
Adverse selection
The tendency for people who have a higher probability of loss than the average to seek insurance.
Avoid by: obtain more info, genetic fingerprint, waiting period, globalisation
Moral hazard
Phenomenon that a person will behave less carefully because he is insured.
Avoid by: ex ante risk classification, bonus-malus, experience rating, deductibles, caps, recourse action
Subsidy aversion
A person with a certain risk profile that has to pay for the loss of the group with higher loss expectancy will leave the group to avoid subsidising the loss.
Liabilities components
Capitals Technical provisions: - premium provisions - claim provisions - mathematical provisions (capitalisation of premiums to build up a reserve for future claims and to avoid varying premiums)
Quota share treaty
A certain percentage of the risk (and premium) is kept by the direct insurer. Proportional, simple, no moral hazard.
Surplus treaty
The direct insurer cedes all the fractions of risks in every contract that exceed a fixed limit.
Excess of loss treaty
The insurer covers for the part of the loss that exceeds a certain amount and cedes the rest of the loss to the reinsurer.
Insurance as a contract
A contract whereby, in turn for a premium, the insurer promises the policyholder to give coverage under the conditions and within the limits stipulated in the contract, upon the happening of the insured event.
Composite risks
When the realisation of the risk implies the occurrences of several successive events
Putative risks
Where the uncertainty of the occurrence of the insured event exists in the mind if the parties, and where the concept of risk is thus subjective
