Topic 6 - Insurance

Question 1

Risk can be classified in a number of ways.

Answer 1

Speculative risk and pure risk are two classifications.

Question 2

Speculative risk

Answer 2

arises where there is a chance of a loss or a gain.Gambling is a good example of a speculative risk.

Question 3

Pure risk

Answer 3

arises where there is only a possibility of loss or no loss. Pure risks are normally provided for by insurance.

Question 4

Pure risk can be categorised as follows.

Answer 4

• Personal — matters that affect the individual. Death, illness, incapacity or unemployment cause income to cease or be reduced.
• Property — loss or damage to property, such as a building burning down or car damage in an accident.
• Liability — losses suffered as a result of a legal liability incurred.

Question 5

Risk management

Answer 5

provides a systematic approach to the management of pure risk.

Question 6

The risk management process can be divided into five broad steps as follows.

Answer 6

1. The identification of risk — what risk is the client exposed to?
2. The evaluation of risk — what is the likely cost of the risk the client is exposed to?
3. The control of risk — what measures can be put in place to reduce or avoid risk?
4. The financing of risk — will the client retain some risk and finance this through their own resources or will they seek to transfer this risk through the use of insurance?
5. The review of risk management program — working back through steps 1 to 4 above on a periodic basis.

Question 7

The pooling of risk

Answer 7

Insurance is based on the principle of pooling risk where individuals contribute resources to a fund that is used to pay for the adverse consequences suffered by some members of the pool. Such insurance is normally organised through an insurance company and the contribution to the pool is generally referred to as a premium.

Question 8

The insurance marketplace comprises of

Answer 8

The marketplace comprises insurers, intermediaries, clients and regulators.

Question 9

There are broadly three types of insurers operating in the market.

Answer 9

1 - life Insureres eg - comminsure
2 - general insurers eg AAMI
3 - Health insurers eg Medibank

Question 10

Two types of misrepresentation are recognised:

Answer 10

innocent misrepresentation

fraudulent misrepresentation

Question 11

innocent misrepresentation —

Answer 11

where the statement is inaccurate but made without fraudulent intent

Question 12

fraudulent misrepresentation

Answer 12

fraudulent misrepresentation — where the statement was inaccurate but made knowingly, believing it to be untrue, or where the statement was made recklessly.

Question 13

There are several risks for business, and these need to be recognised and provided for.

Answer 13

• Partnership.
• Key employee
• Business loans.

Question 14

In establishing an adequate sum insured, three areas need to be considered:

Answer 14

• A lump sum amount to meet costs at the time of premature death of the income earner.
• A provision to meet the needs of dependants for the period of their dependency after premature death of the income earner.
• A provision to meet the needs of dependants and the income earner in the event of disablement of the income earner.

Question 15

Term Life Policy Features

Answer 15

• Indexed sum insured.
• Special sum insured increase. Another benefit often found in policies is a provision that allows for an increase in the sum insured at other times, again without the need for a medical check. The ability to do this arises at the occurrence of certain specified events, such as marriage of the insured, the birth of a child or taking out a mortgage. The policy provision usually specifies minimum and maximum amounts for the increase and the frequency with which these increases can be made. The main value of this benefit lies in the fact that a medical check is not required. If, after effecting the policy, the insured acquires a condition that would be a bar from effecting further cover, this policy provision allows the insured to obtain sum-insured increases.
• Guaranteed renewal.
• Multiple lives. Most insurers will allow more than one life to be covered under the one policy.
• Policy duration. Generally the policy can be taken out for any period of time ranging from 1 day to a term that continues until the insured turns 65 years. - Premiums are either stepped premiums or level premiums.
• Convertibility. There is generally a provision that allows you to convert the policy to any other type of policy with the insurer so long as the sum insured is the same

Question 16

Policy ownership

A term life policy can be:

Answer 16

in the name of the life insured
in the name of the life insured but with a beneficiary nominated for the proceeds to be paid to
in the name of a person or company on the life of the person insured.

Question 17

Medicare

Answer 17

Medicare provides free treatment as a public patient in a public hospital and subsidised treatment by health professionals such as doctors, specialists and optometrists for certain services.

Medicare provides a range of medical and hospital benefits.

• Medical benefits. This includes fees
• Hospital benefits. This means that the patient is attended by doctors and specialists nominated by the hospital. Most of the cost is met by Medicare.

Question 18

Private health insurance

Answer 18

Private health insurance provides greater flexibility in where and by whom a person is treated. It also provides cover for services not covered by Medicare.
With private health insurance, patients are able to choose the hospital to be treated in and the specialist who will provide the treatment. In addition, they have access to private wards and, if available, individual rooms.

Question 19

There are broadly three types of policies used in the area of house and contents insurance. A brief description of each follows.

Answer 19

• A policy that covers all risks of loss or damage. Its cover is very broad and the premium is more expensive.
• A policy with listed perils to be covered. The following are included in most covers:
  – Fire
  – Explosion
  – Lightning or thunderbolt
• A policy that provides a cover for all risks of loss or damage in relation to valuables only. This cover is taken in conjunction with the listed perils policy where a broader cover is required for property at and away from the premises.

Question 20

The main home policy exclusions include:

Answer 20

• damage when property has been left unoccupied for more than 60 days
• where the loss or damage is deliberately caused with intent to defraud
• damage caused by structural defects and faulty workmanship in the construction of the building or lack of maintenance to the building
• damage to property caused by tree lopping or the actions of trees, plants or their roots
• accidental damage to TV screens, ceramic stove tops, glass in picture frames, radios and clocks.

Question 21

There are four main types of motor vehicle insurance policies

Answer 21

• Compulsory third party (CTP) insurance.
  This policy is compulsory by law and is effected, usually, at the same time as the vehicle’s registration.
• Comprehensive motor insurance (CMI)
  This is the broadest of the policies and has two main sections. Damage to the vehicle itself. Third-party liability.
  -Fire, theft and third-party property damage insurance (FTTPPD)
  This cover contains the two sections of the comprehensive policy but the own damage section cover is limited to fire and theft of the owner’s vehicle.
• Third-party property cover only (TPPO)
  This policy provides cover for third-party property damage only. It also is used for older vehicles.

Question 22

adverse selection against the fund

Answer 22

Where individuals are able to make choices which alter the risk profile of a fund and which can potentially limit the fund’s ability to meet its commitments and/or unfairly shift obligations between members.

Question 23

agent

Answer 23

Insurer’s representative who directly organises insurance for clients.

Question 24

agreed value cover

Answer 24

Generally applies to motor vehicle insurance where the insured believes their vehicle is worth more than market value and therefore they reach an agreement with the insurer to insure the vehicle at a higher value with a commensurately higher premium.

Question 25

future insurability

Answer 25

A clause in an insurance contract which provides the insured with the opportunity to purchase more cover at future nominated dates without providing further evidence of health status.

Question 26

utmost good faith

Answer 26

Under the Insurance Contract Act 1984 both parties to an insurance contract must display the highest degree of honesty.