Unit 4: Insurance Products and Services

Question 1

Explain how insurance involves transferring risk?

Answer 1

An individual or organisation transfers the risk of an adverse event happening to the insurer.

In return, the insurer receives a fee, knwon as a premium.

Question 2

What are the two ways insurers make a profit?

Answer 2

1. Calculating likelihood of events occurring and charging appropriate premiums.
2. Investing funds from premiums.

Question 3

Why do most banks generally offer third-party insurance products to customers?

Answer 3

After the 2017 Royal Commission, there has been a movement for banks to revert to traditional core banking business.

Customers still want insurance products, so banks offer third-party products, and receive money from the third-party insurers.

Question 4

Who regulates the Australian insurance industry and under what Act?

Answer 4

APRA under the Insurance Act 1973

Question 5

Wat are 3 core obligations for Insurance businesses?

Answer 5

1. Obtain APRA’s approval
2. Comply with APRA regulations
3. Report all regulatory breaches to APRA

Question 6

While APRA sets prudential standards for the insurance industry and issues prudential practice standards, who is responsible for licensing financial service providers, including those who offer insurance?

Answer 6

ASIC

Question 7

What are 5 obligations for insurers under the Insurance Contracts Act 1984?

Answer 7

1. Supply document detailing all provisions of the contract if the policyholder requests this.
2. Act in good faith.
3. Give reasons in writing if insurer doesn’t accept an insurance application, cancels a policy, doesn’t intend to renew, or will renew on worse terms for policyholder.
4. Not deny policyholders compensation for pre-existing conditions if policyholder was not aware of these before entering the contract.
5. Not vary insurance contracts to detriment of policyholder before contract comes up for renegotiatio

Question 8

What is the concept of pooling?

Answer 8

• Insurance is built on principle of pooling: The chance of an insurable event occurring is mathematically predictable, making pooling effective.
• A pool is usually comprised of premium payments and investment returns.
• People paying into a pool can draw from the pool if a risk they are insured against occurs.
• People exposed to similar risks are pooled together.

Question 9

What are two insurance pool requirements?

Answer 9

1. Pool must hold reserves to insure that if actual claims exceed the predicted claims for a given period, the insurance pool is able to meet its commitments to participants.
2. Pool must be large enough to allow for accurate probability calculations to estimate claim frequency and size.

Question 10

Why do most insurance pools charge their participants based on a worst-case scenario rather than an average scenario?

Answer 10

To ensure the pool has sufficient funds to meet claims.

Question 11

What is utmost good faith (in relation to insurance)?

Answer 11

All parties to the policy must be open and honest, and do everything to the best standard (no undue delay, be fair and investigate where required, etc)

Question 12

What are the two broad categories of insurance?

Answer 12

1. General insurance (home, car, travel, etc… all non-life policies)
2. Life insurance (death, illness, or injury)

Question 13

What are the two main types of general insurance?

Answer 13

1. Indemnity (compensating an individual for a financial loss - but not giving profit)
2. Replacement value

Question 14

What is the relationship between excess and annual premiums?

Answer 14

Higher excess = Lower annual premium

(and Lower Excess = Higher annual premium)

Question 15

What are four types of life insurance products?

Answer 15

1. Life
2. TPD (Total and Permanent Disability)
3. Trauma
4. Income protection insurance