Insurance business

Question 1

Upper limit of insurance domain

Answer 1

Uninsurability:

• technical reasons: natural catastrophes, interruption insurance
• legal reasons: intentional acts

Question 2

Lower limit of insurance domain

Answer 2

Risk management, auto-insurance, captives, and other techniques of alternative risk transfer

Question 3

Left border of insurance domain

Answer 3

Social insurance and social security

Question 4

Right border of insurance domain

Answer 4

Other financial activities: banking, investment

Question 5

Insurance technique definition

Answer 5

The compensation of the detrimental effects of fate upon man’s patrimony by mutualisation organised according to the rules of statistics

Question 6

Key issue to insurer

Answer 6

Predict losses
“the inversion of the production cycle”
Calculate probabilities and technical provisions to fulfil future debts

Question 7

Two major models of insurance business

Answer 7

• Mutual insurance associations: non-profit, variable contributions
• Fixed premium insurance: for profit, less vulnerable by using financial market

Question 8

Other models of insurance business

Answer 8

• Captives
• Direct writing company
• Pools
• Bancassurance
• Assurfinance

Question 9

Principles of insurability

Answer 9

• 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

Question 10

Adverse selection

Answer 10

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

Question 11

Moral hazard

Answer 11

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

Question 12

Subsidy aversion

Answer 12

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.

Question 13

Liabilities components

Answer 13

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)

Question 14

Quota share treaty

Answer 14

A certain percentage of the risk (and premium) is kept by the direct insurer. Proportional, simple, no moral hazard.

Question 15

Surplus treaty

Answer 15

The direct insurer cedes all the fractions of risks in every contract that exceed a fixed limit.

Question 16

Excess of loss treaty

Answer 16

The insurer covers for the part of the loss that exceeds a certain amount and cedes the rest of the loss to the reinsurer.

Question 17

Insurance as a contract

Answer 17

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.

Question 18

Composite risks

Answer 18

When the realisation of the risk implies the occurrences of several successive events

Question 19

Putative risks

Answer 19

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