Ch 8: General insurance products

Question 1

4 Key features of General Insurance Contracts

Answer 1

1. Short term (typically one year contracts)
2. Multiple Claims
3. Claim amounts are UNKNOWN and VERY VOLATILE
4. Delays in reporting and settlement of claims

Question 2

List the four generic groups of general insurance products

Answer 2

1. Liability
2. Property damage
3. Financial loss
4. Fixed benefit

Question 3

List the products covered under Liability Insurance

Answer 3

1. Employer’s
2. Motor third party
3. Public
4. Product
5. Professional indemnity

Question 4

List the products covered under Property Damage Insurance

Answer 4

1. Residential buildings
2. Commercial buildings
3. Movable products
4. Land vehicles
5. Marine craft
6. Aircraft

Question 5

List the products covered under Financial Loss Insurance

Answer 5

1. Pecuniary loss
2. Fidelity guarantee
3. Business interruption
4. Cyber security

Question 6

List the products covered under Fixed Benefit Insurance

Answer 6

1. Personal accident
2. Health
3. Unemployment

Question 7

What is the General Insurance split?

Answer 7

• personal lines – contracts sold to individuals, such as residential buildings and contents insurance
• commercial lines – contracts sold to businesses, such as commercial property, employers’ liability and business interruption insurance.

Question 8

What is the difference between Short-vs long-tailed business?

Answer 8

• short-tailed means that claims are generally reported quickly and settled quickly by the insurer, and
• long-tailed means that there is a sizeable proportion of total claim payments that take a long time to be reported and/or a long time for the insurer to settle.

Question 9

Define a Rating Factor

Answer 9

A rating factor is a factor used to DETERMINE the PREMIUM rate for a policy. which is measurable in an objective way and relates to the likelihood and/or severity of the risk.

It, therefore, must be a risk factor itself or a proxy for a risk factor(s).

Question 10

How are profits determined for General Insurance Contracts?

Answer 10

’+ Premiums net of reinsurance premiums paid
‘+ Investment income and gains
‘- Claims incurred net of reinsurance recoveries
‘- Expenses and commission
‘- Tax
‘= Profit

claims incurred = claims paid + increase in provisions.

Question 11

List the different types of reserves/provisions for general insurance contracts

Answer 11

1. Outstanding reported claims reserve.
2. IBNR reserve.
3. Unexpired risk reserve.
4. Catastrophe reserve.
5. Claims handling expense reserve.

• an outstanding reported claims reserve (for claims that the insurer knows about, but have not yet been settled)
• an incurred but not reported (IBNR) reserve (for claim events that have occurred but which the insurer does not yet know about)
• an unexpired risk reserve (for claims that have not yet happened in a future period of cover)
• a catastrophe reserve (for, strangely enough, catastrophes)
• a claims handling expense reserve.

Question 12

8 Key risks under general insurance contracts

Answer 12

1. Claim frequency, amount, volatility and delays.
2. Accumulations of risk (geographical & by class of business) and catastrophes.
3. Investment risks. (poor or volatile returns, falls in asset values, default risk)
4. Expenses higher than expected.
5. Poor persistency (high lapses, low renewals).
6. New business volumes too high or too low (too high = new business strain; too low = not enough business to spread overhead expenses across)
7. Credit risk (reinsurer or broker)
8. Operational risk (fraud, systems failure, regulatory changes)

Question 13

Risk Management Tools used by general insurer.

Answer 13

1. Reinsurance.
2. Underwriting.
3. Diversification across classes of business or geographically.
4. Monitoring experience (claims & expenses)

Question 14

Outline the seven features of liability insurance

Answer 14

1. Provides indemnity where the insured, due to some form of negligence, is legally liable to pay compensation to some third party
2. The legal fees associated with the claim are usually also covered
3. Illegal acts of negligence will invalidate the claim and no payment will be made by the insurer
4. There may be an upper limit and/or excess amount applied to the claim
5. On the occurrence of a claim the cover may be cancelled, or a reinstatement premium or higher premium might be required for the cover to continue
6. The claims are usually medium to long tailed and are likely to be real in nature
7. International or national laws apply, depending on the type of cover

Question 15

List the perils covered by employer’s liability insurance

Answer 15

1. Accidents caused by negligent actions by the employer
2. Exposure to harmful substances
3. Exposure to harmful working conditions

Question 16

List the perils covered by motor third party liability insurance

Answer 16

1. Motor accidents caused by the insured

Question 17

List the perils covered by public liability insurance

Answer 17

Depends on the type of policy

Question 18

List the perils covered by product liability insurance

Answer 18

1. Faulty product design, manufacturing or packaging

2. Misleading or incorrect instructions

Question 19

Define indemnity, and give examples of where insurance does not fully indemnify the policyholder

Answer 19

Indemnity is compensation/reimbursement for a loss incurred. The idea is to return a policyholder to the same financial position they were in before the loss event.

Examples of non-indemnity insurance include:

• Fixed benefit insurance
• Insurance where there is an excess or a maximum claim
• “New-for-old” insurance

Question 20

List the perils covered by buildings insurance

Answer 20

1. Fire
2. Explosion
3. Lightning
4. Theft
5. Storm
6. Flood

Question 21

List the perils covered by contents insurance

Answer 21

1. Fire
2. Explosion
3. Lightning
4. Theft
5. Storm
6. Flood

THEFT is the major peril

Question 22

List the perils covered by marine hull cover

Answer 22

1. Perils of the sea
2. Fire
3. Explosion
4. Jettison
5. Piracy

Question 23

List the perils covered by pecuniary loss insurance

Answer 23

1. Bad debts

2. Third party failure

Question 24

List the perils covered by fidelity guarantee insurance

Answer 24

1. Dishonest employee actions
2. Fraud
3. Embezzlement

Question 25

List the perils covered by business interruption insurance

Answer 25

1. Being unable to conduct business

Question 26

List the perils covered under personal accident insurance

Answer 26

Accidents resulting in loss of limb(s) or other specified injury

Question 27

List the perils covered under health insurance

Answer 27

Need for treatment in a hospital

Question 28

List the perils covered under unemployment insurance

Answer 28

Redundancy