lecture 10

Question 1

 What is risk?

Answer 1

o Uncertainty of outcomes

o A range of possible outcomes where we can measure the likely probability that the outcome will happen
 Some risks are within your control eg. Cancer from smoking
 Some are not e.g. getting hit by lightning

o Uncertainty
 Not able to put a number to the probability occurring

Question 2

 Risk management

Answer 2

o A branch of management that provides a systematic approach to the management of pure risk

o	Procedure
	Identify the risks, premature death, 
	Evaluate the risks 
•	lump sum costs, funeral etc
•	costs that change because of injury

Question 3

 Methods of quantifying risks===Multiples approach for the provision of dependents

Answer 3

 Amount when invested will produce an annual income similar to the pre-death income
 Take gross income and apply a rate of return
 Is simple but ignores inflation and other resources

Question 4

oMethods of quantifying risks= Needs analysis approach

Answer 4

 Calculate amount needed for the dependents to maintain their standard of living
• Dependent needs change at different life stages

 Calculate the resources the dependents currently must meet those needs

 Cover needed = needs – resources

Question 5

 Discussion with the client for needs analysis approach

Answer 5

o Listen to what is important
o Need to consider more factors
o Provide as much detail as possible
o Educate the client as to how you calculated the sum insured
o Inform client on any assumption used in calculation

Question 6

 Underwriting

Answer 6

o Insurance underwriting involves evaluating and measuring the risk and exposures of potential clients

o They decide
 Coverage client should receive
 Premium level the client should pay
 Whether to accept the risk and insure the client completely or with exclusions or to decline the risk

o	The information used to evaluate the risk of an applicant for insurance will depend on the type of coverage involved. Factors need to be considered
	Age
	Gender
	Health status
	Smoking status
	Recreational pursuits
	Occupation
	Location of residence

Question 7

 Risk management 2

Answer 7

o Handle the risk
 Eliminate
 Retain the risk
 Transfer the risk to another party

Question 8

 What is insurance?

Answer 8

o A practice by which a company or government agency provides a guarantee of compensation for specified loss, damage, illness, death in return for payment of a premium

o Insurance is not a free lunch for the insured
 Will pay premiums to the insurance company
 Premium will therefore incorporate the probability of the insured suffering a loss, the size of the payout, and an appropriate discount factor
 In aggregate, insurance company expects to collect more premiums then they are expected to payout

Question 9

 The insurance marketplace

Answer 9

o	Insurers
	Three broad categories of insurance companies
•	Life insurers
•	General insurers
o	Property
o	Liability
•	Health insurers
o	Provide hospital and medical cover

o Intermediaries
 Agents and brokers, arrange insurance for clients
 The insurers representative whose function is to arrange cover for client= agent
 Broker = insured’s representative to ascertain the client’s needs and arrange best term for the client

o Regulators
 ASIC and APRA
 ASIC = Consumer orientated
 APRA = Prudential regulation

Question 10

 Principle of utmost good faith

Answer 10

o Insurance is a contract between the insurer and the insured
o Based on good faith, highest degree of honesty
o There is a duty to disclose all the material facts that would influence a reasonable and prudent insurer
o Consequences, contract can become void

Question 11

 Life insurance

Answer 11

o Provides a lump sum to the policy owner or the nominated beneficiaries if the insured person dies

o A term life policy pays death benefit when person dies during period of insurance

o Whole life policy pays the death benefit when person dies
 Only have term life in Australia now

Question 12

 Life policies

Answer 12

o Are now term life

o Policy features
 Indexed sum insured
 Options for policy duration
 Premiums

o Some common exclusions
 Suicide within first 13 months of insurance coverage
 Self-inflicted injuiries
 Death resulting from war and warlike activities
 Where are pre-existing condition that was not disclosed to the insurer before entering the cover is the cause of death

Question 13

 Disability Policies

Answer 13

o Duty Based
 Unable to perform any of the principal income producing details

o Time Based
 Unable to perform own occupation for more than 10hours per week

o Income based
 Unable to generate at least 80% of their pre-disability income through personal exertion in occupation

Question 14

types of total and permanent disabilities

Answer 14

o	Own Occupation TPD
	People who qualified in a specific occupation
	Specialist
	Prove can’t work in own occupation
	50% extra loading on premiums

o Any occupation TPD
 Can’t go back into workforce
 Cheaper premiums but harder to prove

Question 15

 Disability insurance

Answer 15

o Income protection

 Provides cover that replaces income in the event of the insured being unable to work because of accident

Question 16

 Income protection

Answer 16

o To manage expenses if you are unable to work for a certain amount of time due to injury / sickness

o Monthly sum insured
 Usually up to 75% of lost income
 Due to having access to sick leave, annual leave, workers comp etc.

o Waiting period
 Most benefits are subject to a waiting period before the benefits become payable
 Shorter waiting period = higher premium

o Benefit payment period
 Maximum period for which a claim is payable
 Shorter period = lower premiums

Question 17

 Key features of income protection insurance

Answer 17

o Type of cover
 1> Indemnity cover
• Based on 12-month consecutive period of pre-disability earnings
• For those with stable income

 2> Agreed value- based on agreed level of income
• Greater contractual certainty but 15-20% more expensive
• For those concerned with income fluctuations or periods of leave

o For business owners, there is business overheads insurance
 Where the insured is largely responsible for producing business income
 Covers fixed, not variable expenses

Question 18

 Trauma insurance

Answer 18

o Provides a lump sum if the insured person suffers a trauma condition
o E.g. Heart attack
o Tax free lump sum payment
o No restriction on how it can be used

Question 19

 Trauma insurance -  Premium Structure

Answer 19

o Stepped premiums
 Recalculated at each policy renewal, increases with risk factors such as age
 May seem less expensive than level premiums in the short term

o Level premiums
 Calculated based on age at start of policy
 May pay a little more when you take out the policy
 Premiums are generally less expensive than stepped premiums

Question 20

 Arranging insurance through a superannuation fund

Answer 20

o Risk policies eg. Life, TPD, IP, can be arranged via super

o Advantages
 Premiums are less due to group underwriting / super fund bargaining power
 Life and TPD premiums may be tax deductible by the fund

o Disadvantages
 Payouts to super fund, event may not trigger condition of release, trapped until preservation age
o Necessary to have a binding death nomination to overcome issue of trustee discretion

Question 21

 Pros of insurance inside super

Answer 21

o Premiums are paid with pre-tax dollars, so they are cheaper (life insurance only)
o Negotiate cheaper rates, dealing in bulk
o Automatic acceptance up to certain amounts of cover, no need for health checks

Question 22

 Cons of insurance inside super

Answer 22

o May not be able to access the benefits until retirement or a condition of release is met
o Death benefits may be taxed, depending on whom the benefit is paid
o Cannot insure for TPD own occupation
o If you have insurance inside super and you change employers, you will have to apply for new insurance

Question 23

o Estate planning issues

Answer 23

 If the policy is owned by the life insured it is generally paid to the estate and distributed based on will
 Policy owned by super, important to have a legally binding death benefit nomination
 If policy is owned by 3rd party, proceeds are paid to them

Question 24

 Types of insurance

Answer 24

o	Personal
	Life
	Disability
	Income
	Trauma

o	General
	Liability and indemnity
	Workers compensation
	Business
	Travel
	Content
	Health