Insurance Products - Background

Question 1

What is insurable interest?

Answer 1

It is what differentiates insurance from other types of financial risk, i,e:

1. The policyholder (contract holder) has to have an interest in the risk being insured
2. The risk must be of a financial and quantifiable nature
3. The amount payable in the event of a claim must bear some relationship to the financial loss incurred

Question 2

What is insurable risk?

Answer 2

1. The risks must be independent (not always possible, use RI)
2. Low probability of occurrence
3. It should be possible to pool together a large number of risks to reduce variance
4. There should be an overall limit on liability undertaken
5. Moral hazard or anti-selection against the insurer should not be possible
6. There should be sufficient existing statistical data/information to inform the frequency and severity of possible claims

Question 3

What is a losses occurring policy?

Answer 3

A policy providing cover for losses occurring in the defined period no matter when they are reported, possibly subject to a discovery period

Question 4

What is the other term for a losses occurring policy?

Answer 4

Claims occurring policy

Question 5

What is a claims made policy basis?

Answer 5

A claims made policy covers all claims reported to an insurer within the policy period irrespective of when they occurred. Also referred to as “claims reported policy”

Question 6

When might a claims made basis be appropriate?

Answer 6

A claims made basis may be appropriate when it is not clear when the loss actually occurred. This might be true for certain liability classes, where the loss emerges gradually over time, e.g. deafness caused by continual exposure to loud noises at work under an employer’s liability product

Question 7

What is the main problem for an employer switching from a claims made to losses occurring basis?

Answer 7

There is potential for gap in cover. If the loss occurred under the previous period of coverage and is reported under the new period of coverage neither policy will respond as on a claims made basis it would have to be reported in the previous year (Example : An old injury from an employee has a relapse in the current year and compensation is requested, the current policy on a losses occurring basis won’t respond as the loss occurred last year and the previous policy will not respond as the claims was not reported in the previous year)

Question 8

What is moral hazard?

Answer 8

The risk that an insured may act differently because of being insured

Question 9

Why is underinsurance a hazard to an insurer?

Answer 9

The insurer will base it’s premium rates on the expected claim amounts (expected frequency and severity) if the sum insured is too low, the premium may be inadequate.

Question 10

What is the discovery period?

Answer 10

A time limit usually defined in the policy wording or through legislative precedent, placed on the period within which claims must be reported. It allows insurance companies to write off IBNR once the discovery period has elapsed