Principles Of Insurance Flashcards
What is Lloyd’s of London?
An insurance market
How was Lloyd’s of London founded?
It was born out of a coffee shop opened by Mr Edward Lloyd in the late 1680s. It was frequented by ship owners, merchants and captains so became a meeting place and news hub
What is meant by “the common pool”
The contributions of the many pay for the losses of the few
Which principle is described by the phrase “the contributions of the many pay for the losses of the few”?
The common pool
What is insurance?
Insurance is a contract or legal agreement between the insured (first party) and the insured (second party) to provide compensation in the event of a financial loss
In insurance who is the:
A) First party?
B) Second party?
C) Third party?
A) The insured/policyholder
B) The insurer
C) Anyone else
In what two circumstances can insurance be compulsory?
- Compulsory by law
2. Compulsory by contract
What insurances are compulsory by law?
Motor insurance
Employer’s Liability
Professional Indemnity for certain professions (eg doctors or solicitors)
Public Liability for owners of dangerous dogs/animals and owners of riding establishments
Why is motor insurance compulsory?
It is statute under the Road Traffic Act 1930 to have motor insurance for third party injury, death, and property damage
What statute made Employer’s Liability compulsory?
Employer’s Liability (Compulsory Insurance) Act 1969
How is the Dangerous Dogs Act 1991 relevant to insurance?
It made it compulsory for owners of dangerous dogs to have appropriate public liability insurance as determined by their local authority
Why must owners of riding establishments have public liability insurance?
It is compulsory to have insurance to be granted a licence as required by the Riding Establishments Acts of 1964 and 1970.
When may insurance be compulsory by contract?
Mortgage or tenancy agreements are the most common examples
What is the difference between insurance and assurance?
Insurance is for uncertain events which may or may not happen.
Assurance is for things which are inevitable
What are the 6 main benefits of insurance?
- Risk transfer mechanism
- Peace of mind
- Invisible exports
- Encourages enterprise
- Reduction of losses
- Investment by insurers
What are the four key components of risk?
- Uncertainty
- Level of risk
- Perils
- Hazards
How would you sum up risk in one word?
Uncertainty
What 2 characteristics are used to assess the level of risk?
Frequency and severity
When measuring the level of risk, what is frequency and what is severity?
Frequency is how likely an event is to occur. Severity is the amount of loss it would cause if it were to occur
Define peril
An event which gives rise to a loss
Define hazard
That which influences a peril
What are the two types of hazards?
Physical and moral
What is the difference between physical and moral hazards?
Physical hazards relate to the risk itself
Moral hazards relate to the person/proposer
Give some examples of moral hazards
Age Occupation Convictions Claim history Experience
Give some examples of physical hazards
Location Vehicle modifications Security/Safety features Construction Make/Model of a vehicle
Are hazards good or bad?
They can be either good or poor depending on whether they have a positive or negative impact on the risk
What 3 characteristics must a risk possess in order to be insurable?
- Pure
- Financial
- Particular
What 3 types of risks are un-insurable?
- Fundamental
- Non-financial
- Speculative
What is meant by a “pure” risk?
Does not involve prospect of financial gain
What is meant by a “financial” risk?
The loss can be measured in financial terms
What is meant by a “particular” risk?
Relates to one individual thing or event
What is meant by a “fundamental” risk?
The effects are widespread and cannot be traced back to one cause/event/thing (eg war, famine)
What is meant by a “non-financial” risk?
The loss is unable to be measured in financial terms (eg the loss is purely sentimental)
What is meant by a “speculative” risk?
There is the potential for financial gain as well as loss (eg you cannot insure your investments in the stock market or gambling bets)
What 3 features must apply for a risk to be insurable?
- Fortuitous event
- Insurable interest
- Not against public policy (law)
What is meant by the term “fortuitous event”?
The loss must be accidental
What is meant by “insurable interest”?
The legal right to insure arising out of a financial relationship, recognised in law, between the party seeking insurance and the subject matter of the insurance
i.e. The proposer must stand to lose financially in the event of a loss (you cannot insure a stranger’s car for example because you won’t lose anything)
What is meant by “homogenous exposures”?
A sufficient number of exposures to similar risks to enable the insurer to make accurate predictions or forecasts of future losses
Why do insurers like homogenous exposures?
They can more accurately predict future claims patterns
What are the four keys ways of risk sharing?
- Co-insurance
- Self insurance
- Captive insurance
- Re-insurance
What is co-insurance?
An insurer shares a risk with other insurers. Eg two insurers take a 50% share each and split the premium/claims payments in the same proportion
What is self insurance?
A company sets aside a fund of money to pay their own claims (effectively they are uninsured)
What is captive insurance?
A company whose full time profession is not insurance establishes an insurance company who they wholly own in order to solely manage their risk
What is reinsurance?
An insurer accepts a risk and then cedes part of that risk to another insurer - effectively they take out insurance again. This protects their position and may enable them to recoup a portion of paid claims
What are the 7 key roles of insurance professionals?
- Underwriters
- Intermediaries/Brokers
- Claims Handling Agents
- Claims Personnel
- Loss Adjusters
- Loss Assessors
- Risk Managers
What is the difference between a loss adjuster and a loss assessor?
A loss adjuster is appointed by the insurer, a loss assessor is hired by the insured
What are claims handling agents?
Companies who are appointed by an insurer to act on their behalf to deal with claims
Who are the two UK regulators?
- Financial Conduct Authority (FCA)
2. Prudential Regulation Authority (PRA)
Who are the CBI?
Central Bank of Ireland - responsible for regulation of all financial firms, including insurers, within Ireland
What is the role of the Financial Ombudsman?
An independent body to resolve disputes and complaints
Who are the ABI?
Association of British Insurers
What is the MIB?
Motor Insurers Bureau
What are the 2 MIB agreements?
- Untraced Drivers - Provide compensation in “hit and run” cases if the untraced driver would be liable to pay compensation. However the claimant must be able to identify the vehicle that hit them (eg registration number) for property claims (not for injury)
- Uninsured Drivers - Provide compensation for losses caused by uninsured drivers.
For both agreements there is a cap of £1 million for property damage and no limit for injury
What is the strategic objective of the FCA?
To ensure the relevant markets function well
What are the 3 operational objectives of the FCA?
- To secure an appropriate degree of protection for consumers
- Protect and enhance the integrity of the UK financial system
- Promote effective competition in the interest of the consumer
What is the general objective of the PRA?
To promote the safety and soundness of regulated firms
What is the insurance specific objective of the PRA?
To secure an appropriate degree of protection for those who are or may become policyholders
What are the 6 principles of insurance?
- Insurable interest
- Indemnity
- Contribution
- Subrogation
- Utmost good faith
- Proximate cause
How can insurable interest be created?
By ownership, contract or statute
What is indemnity?
Returning the policyholder to the same pecuniary position that they enjoyed immediately before the loss occurred
“Make them whole” but do not better their position
What are the four methods of settlement available to insurers?
Repair
Replacement
Cash Settlement
Reinstatement
How is the principle of indemnity commonly modified?
New for old cover or agreed value
How does reinstatement modify the principle of indemnity?
No allowance is made for wear and tear
What is contribution?
The right of one insurer to call upon others similarly, but not necessarily equally, liable for a loss to share with them the cost of indemnity
What is the most common way for contribution to arise?
A person with a household policy that covers theft outside the house goes on holiday with travel insurance. If the item is stolen both policies could respond, in which case contribution will apply and the cost will be shared between the two
What must be true for contribution to arise?
There must be two or more policies of indemnity covering a common interest, subject matter and peril which are liable for the loss
What is “utmost good faith”?
A positive duty to voluntarily disclose, accurately and fully, all material circumstances to the risk being proposed
What 2 pieces of legislation modified the principle of utmost good faith?
Consumer Insurance Disclose and Representations Act 2012
Insurance Act 2015
What is a material circumstance?
Anything which influence the judgement of a prudent underwriter in determining whether to accept a risk or fix the price
What is non-disclosure?
Failing to tell the insurer something which should have been disclosed
What is misrepresentation?
Deliberately not telling the truth
What are the 3 types of breach of the duty of disclosure under CIDRA?
- Honest
- Reckless
- Careless
What remedies are available to an insurer if a breach is:
a) Honest
b) Careless
c) Reckless
a) Nothing - they would have to meet the claim in full
b) They may impose the terms they would have done if the breach had not occurred, or reduce the claim in proportion if they would have charged a higher premium
c) They may avoid the policy ab initio, refuse all claims, and keep all collected premiums
Define proximate cause
The active efficient cause which sets in motion a chain of events which brings about a result without the intervention of any force started and working accurately from a new and independent source
Why is proximate cause important?
1) To establish if the peril is covered by the policy
2) To establish the excess if more than one exists
Which principle of insurance has the following definition:
“The right of party to stand in the place of another and avail themselves of that parties rights and remedies”
Subrogation
In what ways may insurers exercise their subrogation rights?
Salvage
Recovery of payments/costs from a liable third party
Give some examples of high frequency, low severity, events
Minor car accident
Broken windscreen/window
Lost, stolen or damaged phone
Etc - anything which occurs often but has a low cost
Give some examples of low frequency, high severity, events
Flood
Subsidence
Earthquake
Etc - anything which occurs rarely but has a high cost
