Study 1 - The Insurance Industry in Canada

Question 1

What are the Fundamental Principals of Insurance?

Answer 1

• Insurance is a promise to indemnify
• The premiums of the many are used to pay the losses of the few.
• The premium shall be commensurate with the risk. If premium charged is not enough then the company would fail.

Question 2

What is the law of large numbers?

Answer 2

A Mathematical Premise - states that the degree of certainty in probabilities increases as the number of events increases.

Question 3

What is adverse selection?

Answer 3

results when an insurance company charges too high a premium for a risk.
Occurs when a broker places its poorer risks with one insurance and its better risks with another insurer.

There needs to be a mix of poor and good risk
And the premium shall be commensurate with the risk. I

Question 4

What are the four (4) basic functions of Reinsurance?

Answer 4

1. ) Financing
   - frees up capital to be used elsewhere
2. ) Stabilization
   - keeps operational results within reasonable parameters and maintains confidence of investors
3. ) Capacity
   - allows the insurer to attract business it may not have the capacity for otherwise
   - If a subscription policy, insurer that accepts the largest share of risk can set T&Cs
4. ) Resource Protection against Catastrophic Losses
   - protects their capital and surplus and loss ratio and investment position against cat losses

Question 5

What are the effects of insurance on society?

Answer 5

• Banks are willing to lend money
• Developers are willing to advance funds to contractors (surety bonds)
• Retailers more willing to accept risk of operating a business (liability)
• Professionals able to practice while minimizing the risk of E&O and malpractice suits
• Manufacturers willing to take on risk of shipping (transportation insurance)
• Members of society safer and more protected when operating a vehicle (auto insurance)

Question 6

What are Economic Impacts of Insurance?

Answer 6

• Insurance industry employs thousands directly and indirectly
• P&C insurers hold billions of dollars in assets, used to help finance government and businesses
• Risks inherent in society would be too much for individuals and business to bear alone
• Insurance co.’s are heavily taxed
• Insurers pay billions for medical/rehab/lost wages
• Local economies Benefit from claims settlement process

Question 7

What are the Consumer Impacts of Insurance

Answer 7

Depends on the market cycle

• Soft market - consumers are neutral
• Hard market - consumers are critical

Insurance helps itself to be viewed more positively through educating the public and moving toward plain language policy wordings.