Insurance Chapter 12

Question 1

What is Risk management?

Answer 1

A planned approach to minimising the risk that a business / household is exposed to.

Question 2

Give Examples of Risk Management techniques

Answer 2

Security Measures e.g installing a security alarm
Proper Training
Insurance e.g house and contents insurance

Question 3

Explain insurance and how it works

Answer 3

Financial protection from risks.
Businesses and households pay a fee (premium) to an insurance company every year.
If anything happens to them or their assets, the company pays them money as compensation for the value of what they have lost.

Question 4

Name the five principles of insurance.

Answer 4

Utmost Good Faith
Insurable Interest
Indemnity
Contribution
Subrogation

Question 5

Explain Utmost Good Faith with example

Answer 5

When filling in the proposal form for insurance, person must tell truth.
Any material information that may affect the insurance cover and premium must be disclosed.
Ex:Penalty points on your driving licence.

Question 6

Explain Insurable interest with example

Answer 6

A person can only insure something they own.
Must have legal relationship with item
You must benefit from its existence and suffer from its loss.
Ex: can insure your own car but you not your neighbour’s car.

Question 7

Explain indemnity

Answer 7

You cannot make a profit from insurance.
Compensation received is equal to value of item lost.
Insurance company will only pay out what the item is worth, not how much it is insured for.
No point over or under insuring asset
In case of under insuring- average clause
Ex: Old car cannot claim for how much a new car would cost

Question 8

What is average clause

Answer 8

Rule used to calculate compensation is an item is under insured

Question 9

What is the formula for average clause

Answer 9

Value of Claim × (Amount The Item Is Insured For/How Much The Item Is Worth)

Question 10

Explain contribution

Answer 10

If you insure an item with more than one insurance company, then they will split the cost of the compensation between them.
Each pays fraction of compensation in ratio of amount you insured with each
This ties in with Indemnity

Question 11

What is the formula for contribution

Answer 11

Value of Claim × (Amount The Item Is Insured For With This Insurer/Total Amounts Insured With All Insurers)

Question 12

Explain subrogation

Answer 12

Once claim is made, ownership of damaged item is transferred to the insurance company.
They own the right to seek compensation from person who caused the damage.
Also entitled to any scrap or salvage value from the asset.
Ex: If bicycle was destroyed in accident worth 300 and you got 300 you cannot sell wreckage as you would make a profit

Question 13

Explain claim from

Answer 13

This is the form filled out by someone who is making a claim on their insurance policy.
Sets out details of asset, damage how it happened, compensation etc
Insurance decided if any how much to pay out

Question 14

Explain insurance policy

Answer 14

The legal document (contract) a person receives from the insurance company when insurance has been taken out.
Legal contract
Sets out risks covered and not covered and premium

Question 15

Explain proposal form

Answer 15

Is the application form that a person fills in when they are applying for insurance
Asks questions to answered truthfully
Uses answers to decide what risk the person is and if they should insure them

Question 16

What does the amount charged for an insurance premium depend on?

Answer 16

Level of Risk – a loading charge may apply
Value of the Item
Amount of Claims Being Made
Profit Margin of the Insurance Company
Government Taxes

Question 17

Explain insurance broker

Answer 17

A person who sells insurance policies on behalf of several insurance companies

Question 18

Explain exclusions

Answer 18

These are specific items or risks that are not insured and are excluded from the insurance policy

Question 19

Explain policy excess

Answer 19

The amount of each claim an insured person must pay e.g the first €500 of a claim

Question 20

Explain loading

Answer 20

An extra charge added to the basic premium if there is an increased risk.

Question 21

Explain actuary

Answer 21

The person responsible for calculating the insurance premium.

Question 22

Explain assessor

Answer 22

The person who investigates an insurance claim and calculates the compensation to be paid.

Question 23

Explain Fidelity Guarantee Insurance for a business

Answer 23

Protects business against losses it may suffer due to illegal or dishonest activities of its employees
Covers dishonest fraudulent activities of employee who abuses his position of trust
Covers: employees stealing, embezzling money or providing information to others to steal from business

Question 24

Explain Public Liability Insurance for a business

Answer 24

Protects against claims made by public who may be injured or have their property damaged on the business premises
Also protects business if claims for business visits member of public house ex: salesperson

Question 25

Explain Product Liability Insurance for a business

Answer 25

Protects against claims made by individuals who are injured by a product of the company
Covers damages caused by manufacturing defect in product, a design flaw and defective warnings or instructions
Also if not properly labelled

Question 26

Explain Buildings and Contents Insurance for a business

Answer 26

A business may insure any buildings and their contents against accidents like fire, theft and flooding

Question 27

Explain Motor Insurance for a business

Answer 27

By law, all motor vehicles must be insured- If has cars, lorries or vans
Insurance protects if the business’s vehicle does damage or injury
Types: Third Party, Third Party Fire and Theft and Fully Comprehensive

Question 28

Explain Employer’s Liability Insurance for a business

Answer 28

Protects businesses against claims made by employees if they are injured while at work
Also if employee is made ill at work at fault of employer
insurance pay compensation

Question 29

Explain Theft Insurance for a business

Answer 29

This compensates businesses against losses incurred when stock or other items are stolen from the company
Insurance pays compensation for value of that stolen

Question 30

Explain Plate Glass Insurance for a business

Answer 30

The insurance company pays compensation to the business if their windows are damaged
Insurance pays compensation to have them fixed/replaced

Question 31

What is the importance of insurance to a business?

Answer 31

Business Survival
Risk Management
Improved Cash Flow
Legal Obligations

Question 32

Explain Health Insurance for a household

Answer 32

This insurance helps to cover the financial impact of injury or serious illness
Pays private medical bills if they become badly ill

Question 33

Explain life assurance for a household

Answer 33

Protects people dependent on insured person financially
Provides compensation to family members of the insured when they die or when the insured person reaches a certain age.
Two types- whole life policies and endowment policies.

Question 34

Explain buildings and contents insurance for a household

Answer 34

A family may take out insurance against the risk of fire, theft or damage to their home and belongings
Insurance will pay to have house rebuilt if destroyed/damaged
Covers Contents damaged or stolen

Question 35

Explain motor insurance for a household

Answer 35

All vehicles must be insured by law
If family has car it must be insured
Company pays for damage or injury cause by family’s car
Types: Third Party, Third party fire and theft, comprehensive

Question 36

Explain mortgage protection insurance for a household

Answer 36

This insurance policy helps a household to pay its mortgage repayments if they cannot pay due to ill health, redundancy or death
Helps until they can afford to pay it again

Question 37

What are the similarities between household insurance and business insurance?

Answer 37

Risk Management
Legal Requirements- motor insurance. Offence not to have , must have valid insurance disk on windscreen
Completion of Proposal Forms- Must obey Utmost good faith
Filling Out Claim Form When Seeking Compensation- Both make claims

Question 38

What are the differences between household insurance and business insurance?

Answer 38

Scale of Potential Losses
Different Types of Risk and Insurance Cover- Business face many more risks concerning employees, public
Different Premiums- Are bigger and have more valuable asset in business- Greater value item higher premium
Business Expense

Question 39

How does the risk impact the insurance premium

Answer 39

Greater risk- higher premium
Sometimes add a loading (extra charge) for higher risk people
This charge covers higher risk
Ex:inexperienced drivers more likely to crash or smokers for life assurance

Question 40

How does the value of the item impact the insurance premium

Answer 40

The valuable the asset the higher the premium

Will have to pay out more money if expensive asset is stolen/damaged

Question 41

How does the claims impact the insurance premium

Answer 41

More insurance company pays out in claims- higher the premium to cover costs
Ex: Increase house insurance premiums following severe winter of 2010/11- damages
Ex: rising cost of healthcare

Question 42

How does the profit impact the insurance premium

Answer 42

Insurance company charges higher premium to make more profit
Must charge premium to make decent profit
Premiums must exceed amount paid out in claims

Question 43

How does the government tax impact the insurance premium

Answer 43

Government adds tax to the premium

This increases the cost for consumer

Question 44

Explain Third party motor insurance

Answer 44

Insurance company pays only for the damage or injury cause to another person and his property

Question 45

Explain Third party, fire and theft motor insurance

Answer 45

Insurance company pays compensation for any damage or injury caused to a third party and his property or if business’s vehicle is stolen or burned out

Question 46

Explain comprehensive motor insurance

Answer 46

Insurance company pays compensation for damage or injury caused to business’s vehicle and to the person driving it and any third party and his property

Question 47

Explain business survival as a reason that insurance is important for a business

Answer 47

Having insurance means business will not be ended by some catastrophe (ex: factory burning)
Insurance company give owner the money to rebuild business
They can start again

Question 48

Explain risk management as a reason that insurance is important for a business

Answer 48

Insurance helps business lower it’s risk

Return for an annual premium insurance company agrees to compensate them for value of losses they sustain

Question 49

Explain improved cash flow as a reason that insurance is important for a business

Answer 49

Paying relatively small premium every year is a lot easier than having to pay out large sum of money to pay for unexpected crisis