Chapter 2: Insurance contracts

Question 1

For a risk to be insurable:

Answer 1

• The policyholder must have an interest in the risk being insured, to distinguish between insurance and a wager.
• A risk must be of a financial and reasonably quantifiable nature.

Question 2

Ideally, risk events also need to meet the following criteria if they are to be insurable:

Answer 2

• Individual risk events should be independent of each other.
• The probability of the event should be relatively small. In other words, an event that is nearly certain to occur is not conducive to insurance.
• Large numbers of potentially similar risks should be pooled in order to reduce the variance and hence achieve more certainty.
• There should be an ultimate limit on the liability undertaken by the insurer.
• Moral hazards should be eliminated as far as possible because these are difficult to quantify, result in selection against the insurer, and lead to unfairness in treatment between one policyholder and another.

Question 3

The types of insurance cover provided by short-term insurance products can be classified under four main headings:

Answer 3

• Liability
• Property damage
• Financial loss
• Fixed benefits.

Question 4

In South Africa, the Short-term Insurance Act (Act no. 53 of 1998, as amended) categorises short-term insurance policies in terms of the area in which they provide cover. The Act defines a short-term policy as including:

Answer 4

• An engineering policy
• A guarantee policy
• A liability policy
• A miscellaneous policy
• A motor policy
• An accident and health policy
• A property policy
• A transportation policy
• A contract comprising a combination of any of these policies

Question 5

The basic benefit provided by any liability insurance is an amount to indemnify the policyholder fully against a financial loss. However, subject to any statutory requirements, this benefit may be restricted by:

Answer 5

• A maximum indemnity per claim or per event (this may involve more than one claim), or an aggregate maximum per year
• An excess (meaning that the insured has to bear the first fixed amount of a claim rather than recovering it from the insurer).

Question 6

The main types of liability insurance are:

Answer 6

• Employers’ liability
• Motor third party liability
• Public liability (often linked to other types of insurance such as property, marine, etc.)
• Product liability
• Professional indemnity

Question 7

Employers’ liability perils can be largely grouped into the following:

Answer 7

• Accidents caused by the negligence of the employer or his employees
• Exposure to harmful substances (for example, chemicals, coal dust, asbestos)
• Exposure to harmful working conditions (for example, loud noises or repetitive strain)

Question 8

Public liability

Answer 8

The insured is indemnified against legal liability for the death of or bodily injury to a third party or for damage to property belonging to a third party, other than those liabilities covered by other liability insurance. As this type of insurance forms part of many types of insurance policy, the insured perils will relate to the type of policy.

Question 9

Product liability

Answer 9

This insurance indemnifies the insured against legal liability for the death of or bodily injury to a third party or for damage to property belonging to a third party, that results from a product fault.

Question 10

Professional indemnity

Answer 10

The insured is indemnified against legal liability resulting from negligence in the provision of a service, for example, unsatisfactory medical treatment or incorrect advice from an actuary solicitor, etc. The perils here depend on the profession of the insured.

Question 11

The main types of property that are subject to such damage are:

Answer 11

• Residential building (for example, house)
• Moveable property (for example, contents of house)
• Commercial building (for example, office)
• Land vehicles (for example, car)
• Marine craft
• Aircraft.

Question 12

Household and commercial buildings property

Answer 12

In respect of buildings, fire is the principal peril insured against but policies can cover many other perils such as explosion, lightning, theft, storm and flood. Damage to the insured property caused by measures taken to put out a fire is also covered.

Question 13

Motor property

Answer 13

The perils include accidental or malicious damage to the insured vehicle, and fire or theft of that vehicle.

Question 14

Marine property

Answer 14

The following perils relate specifically to marine hull cover, but similar perils are covered for marine cargo, marine freight and aviation insurance

Question 15

Financial loss insurance can be categorised as follows:

Answer 15

• Pecuniary loss
• Fidelity guarantee
• Business interruption cover (also known as consequential loss)

Question 16

The benefit provided is indemnity against financial losses arising from a peril covered by the policy.

Answer 16

• Pecuniary loss protects the insured against bad debts or other failure of a third party. Retrenchment cover is also included in this category.
• Fidelity guarantee covers the insured against financial losses caused by dishonest actions by its employees (fraud or embezzlement). These will include loss of money or goods owned by the insured or for which the insured is responsible, and reasonable fees incurred in establishing the size of the loss (paid to auditors or accountants, for example).
• Business interruption cover indemnifies the insured against losses made as a result of not being able to conduct business.

Question 17

For financial risks, the insured perils

Answer 17

• Failure of third parties specified in the policy (pecuniary loss)
• Dishonest actions by employees (fidelity guarantee)
• Fire at the insured’s own property (business interruption cover)
• Fire at a neighbouring premise - causing loss of access to own property (business interruption cover).

Question 18

Fixed benefits

Answer 18

Personal accident

Health insurance

Question 19

The capital requirement currently depends on:

Answer 19

• The design of the contract
• The frequency of payment of the premium
• The relationship between the pricing and supervisory reserving bases
• The level of the initial expenses (including any initial commission).