Insurance Products Background

Question 1

Insurable Interest is a necessary condition for a risk to be insurable. explain

Answer 1

Explanation: The policyholder must have a financial interest in the risk being insured, to differentiate insurance from gambling. The policyholder should benefit from the preservation of the subject matter of insurance and suffer a financial loss in the event of its loss or damage.

Question 2

why should Insurable risks be of a financial and quantifiable nature?

Answer 2

Explanation: The loss should be such that it can be measured in monetary terms, and the probability of the risk event occurring should be known or at least estimated.

Question 3

Explain The amount payable by the insurance policy in the event of a claim must bear some relationship to the financial loss incurred.

Answer 3

Explanation: The insurer must pay an amount that is equal to the financial loss suffered by the policyholder, and not more or less than that.

Question 4

Ideally, risk events should be independent of each other.

Answer 4

Explanation: The insurer benefits from independent risks because the law of large numbers can be applied, leading to more predictable claims experience.

Question 5

Reinsurance is available to help cope with situations where risks are not independent. EXplain

Answer 5

Explanation: Reinsurance transfers a portion of the risk to another insurer, which helps to reduce the insurer’s exposure to the risk.

Question 6

The probability of the event should be relatively small.

Answer 6

Explanation: The insurer should not be exposed to risks that are certain to occur, as it defeats the purpose of insurance.

Question 7

Large numbers of similar risks should be pooled to reduce variance.

Answer 7

Explanation: Pooling similar risks helps to reduce the uncertainty associated with each individual risk and helps to achieve more predictable claims experience.

Question 8

There should be an overall limit on the liability undertaken by the insurer.

Answer 8

Explanation: This helps to ensure that the insurer’s exposure to the risk is reasonably quantifiable.

Question 9

Moral hazards should be eliminated as far as possible

Answer 9

Explanation: Moral hazards are difficult to quantify, and they result in selection against the insurer and unfair treatment between policyholders.

Question 10

What is moral hazard?

Answer 10

Solution 2.1
Moral hazard is defined in the Glossary as the risk that an insured may act differently
because of being insured, ie the policyholder may become less risk averse. For
example, a policyholder may start to leave spare keys under the doormat after taking out
household contents insurance because they feel less concerned about possible adverse
consequences.

Question 11

List e characteristics of Insurable Interest:

Answer 11

The policyholder must have an interest in the risk being insured.
A risk must be of a financial and reasonably quantifiable nature.
The amount payable by the insurance policy in the event of a claim must bear some relationship to the financial loss incurred.

Question 12

List e characteristics of Insurable risk:s

Answer 12

Individual risk events should be independent of each other.
The probability of the event should be relatively small.
Large numbers of similar risks should be pooled to reduce the variance.
There should be an overall limit on the liability undertaken by the insurer.
Moral hazards should be eliminated as far as possible.

Question 13

Uberrima fides:

Answer 13

honesty principle assumed to be observed by the parties to an insurance, or reinsurance, contract.

Question 14

Multiple Claims:

Answer 14

general insurance policies allow the insured to claim as many times as necessary during the period of cover.

Question 15

List 3 points on Nil Claim:

Answer 15

a claim that results in no payment by the insurer.

Question 16

List 3 points on Underinsurance:

Answer 16

taking out an insurance policy with a sum insured that is less than the actual value of the risk being insured.

Question 17

List 3 points on Ideal criteria:

Answer 17

There should be sufficient existing statistical data/information to enable the insurer to estimate the extent of the risk and its likelihood of occurrence.
These ideal criteria are not always met in practice, but insurers may be prepared to underwrite for other reasons, such as generating income or developing a new market.

Question 18

List 3 points on Uberrima fides:

Answer 18

The principle of honesty underlies all insurance business.
Misrepresentation or non-disclosure of any material fact in the proposal can make the policy void.
Each renewal of a general insurance policy constitutes a new proposal, and the insured should disclose any material changes during the period covered by an insurance policy.

Question 19

List 3 points on Multiple Claims and Nil Claims:

Answer 19

Multiple Claims and Nil Claims:
General insurance policies allow the insured to claim as many times as necessary during the period of cover.
Nil Claims still result in administrative expenses for the insurer.

Question 20

Underinsurance:

Answer 20

Underinsurance is taking out an insurance policy with a sum insured that is less than the actual value of the risk being insured.

Question 21

Why is underinsurance a hazard to the insurer?

Answer 21

Solution 2.2
An insurer will base its premium rates on the expected claim amounts. This will take
into account the expected frequency of claims and the expected size of the claims.
The higher the sum insured the higher the expected size of claims. Therefore if a
policyholder quotes a sum insured lower than the actual value of the contents, there is a
risk that the premiums will be inadequate

Question 22

An average clause is included in some property insurance policies to prevent .

Answer 22

underinsurance

Question 23

If the sum insured is less than the full value of the property at the time of a loss, according to the principle of average. the insurance payment will be a proportion of ?

Answer 23

the value of the loss,

Question 24

according to the principle of average Example: If contents worth £30,000 are insured for £20,000, a claim of £600 may only result in a payment of

Answer 24

£400.

Question 25

In marine insurance, the term average refers to

Answer 25

damage or loss.

Question 26

Explain General average loss

Answer 26

General average loss is a loss from a sacrifice or expenditure made by an individual for the benefit of others at a time of peril, such as throwing cargo overboard from a boat to save the remaining cargo and the vessel.

Question 27

Explain Subrogation:

Answer 27

The substitution of one party for another as creditor, with a transfer of rights and responsibilities.

Question 28

In insurance, when an insurer accepts a claim by an insured, they assume

Answer 28

responsibility for any liabilities or recoveries relating to the claim.

Question 29

Example: If an insurer pays for the replacement of a boat following damage or loss, the original boat becomes the

Answer 29

insurer’s property. The insurer may then recover a salvage value for its own benefit.

Question 30

Discovery period:

refers to?

Answer 30

Discovery period:

A time limit defined in the policy wording or through legislative precedent, placed on the period within which claims must be reported.

Question 31

Discovery period: Generally applies to classes of business where

Answer 31

Generally applies to classes of business where several years may elapse between the occurrence of the event or the awareness of the condition that may give rise to a claim and the reporting of the claim to the insurer, such as employers’ liability or professional indemnity.

Question 32

The discovery period prevents claims being made to insurance companies after.

Answer 32

many years after the event that caused the claim

Question 33

Underwriting is:

Answer 33

The process of consideration of an insurance risk, including assessing whether the risk is acceptable and, if so, the appropriate premium, together with the terms and conditions of the cover.

Question 34

Underwriters specify

Answer 34

excesses or exclusions to cover, or required improvements to the risk before cover is provided.

Question 35

For small and standard homogeneous risks, insurers often provide insurance

Answer 35

automatically, without referring the individual risks to the underwriters.

Question 36

The term _______________is also used to denote the acceptance of reinsurance and, by extension, the transacting of insurance business.

Answer 36

Underwriting

Question 37

Policy document:

Answer 37

The policy document sets out the terms and conditions under which an insurer is liable to pay insurance claims in specific circumstances.

Question 38

Policy document:

Answer 38

The policy document sets out the terms and conditions under which an insurer is liable to pay insurance claims in specific circumstances.

Question 39

The relationship between the insured and the insurer is governed by the

Answer 39

policy document.

Question 40

The policy document is a ______and binding ________subject to ________law.

Answer 40

The policy document is a legal and binding contract subject to contract law.

Question 41

Can you think of some more examples of common exclusions?

Answer 41

Solution 2.3
● nuclear or radio-active risks
● earthquakes
● unseaworthiness of vessels
● loss of money and documents

Question 42

List the exclusions that are likely to be applied on a private motor policy

Answer 42

Solution 2.4
● certain specified uses, eg for business (unless explicitly allowed), racing
● depreciation, wear and tear, or damage to car tyres
● where there was an element of illegality, eg the driver did not hold a driving
licence or was under the influence of alcohol or drugs
● insured’s personal accident benefits where the insured is very old
● losses arising in consequence of earthquakes, war, riot or civil commotion

Question 43

Question 2.5
List the reasons for applying exclusions to an insurance policy

Answer 43

Solution 2.5
Exclusions might be used:
● to avoid payment by the insurer in situations where:
– the policyholder is at an advantage through possessing greater personal
information about the likelihood of a claim
– the claim event is largely under the control of the policyholder
– the claim event would be very difficult to verify
– loss occurs as part of the normal course of events, and could be
considered to be depreciation
● where the risk cannot be reliably estimated by the insurer, regardless of whether
or not the policyholder has better information
● when the probability of loss is very high
● the risk is covered by a third party such as the government
● to limit the scope of the policy to make it more appropriate for a particular target
market
● to reduce the premium for competitive reasons
● to reduce the risk of moral hazard and fraud.

Question 44

Exclusions; Exclusions are clauses in a policy that limit the circumstances in which a claim
may be made. examples are?

Answer 44

Some examples of common exclusions are:
● suicide or self-inflicted injury
● dangerous pastimes
● loss resulting from illegal activity by the policyholder
● war, terrorism, civil riot.

Question 45

Exclusions are used to avoid payment by the insurer in situations where:

Answer 45

● the policyholder is at an advantage through possessing greater personal
information about the likelihood of a claim
● the claim event is largely under the control of the policyholder
● the claim event would be very difficult to verify
● the loss occurs as part of the normal course of events and could be
considered to be depreciation

Question 46

Without an exclusion there would be a very high probability of a claim or that the
risk could not be

Answer 46

reasonably estimated.

Question 47

Exclusions are also used where the risk is covered by a third party such

Answer 47

as the
government

Question 48

Exclusions are also used to limit the scope of the policy to make it more
appropriate for a particular target market or

Answer 48

to reduce the premium for
competitive reasons.

Question 49

Exclusions are sometimes used to reduce the risk of

Answer 49

moral hazard and fraud. For
example, theft of a vehicle when the keys have been left in the ignition might be
excluded from a motor policy. This reduces the moral hazard of policyholders’
carelessness, which might result from the existence of insurance cover.

Question 50

Indemnity for loss of cash might be excluded from a household contents policy. This
reduces the risk of

Answer 50

fraudulent exaggeration of loss amounts, as it would be very easy for
a policyholder to claim, but difficult to verify, that large sums of cash had been stolen
when a burglary has taken place

Question 51

Discuss the difference between third-party insurance and comprehensive insurance

Answer 51

The main difference between third party insurance and comprehensive insurance is the kind of coverage it offers. While a third party insurance only covers you for damages and losses you cause to another person or their property, a comprehensive insurance covers you for your own damages and losses as well12.

For example, if you get into an accident that was your fault, a third party insurance will pay for the repairs of the other person’s car, but not for your own car. A comprehensive insurance will pay for both cars3. A comprehensive insurance also covers you for other risks such as theft, fire, vandalism, natural disasters, etc12.

Comprehensive insurance is typically more expensive than a third party insurance, but it has more benefits and peace of mind13. You should compare different quotes and coverages to find the best option for your needs and budget.