Chapter 1: Insurance products - background

Question 1

Main criteria for a risk to be insurable:

Answer 1

1. Policyholder should have an interest in the risk being insured
2. A risk must be of a financial and reasonably quantifiable nature
3. The amount payable in the event of a claim must have a relationship to the financial loss incurred

Question 2

Additionally, for a risk events to be insurable it should ideally:

Answer 2

• Be independent
• Have low probability of occurring
• Be pooled with similar risks
• Have an ultimate liability
• Avoid moral hazards
• Have sufficient statistical data/information to estimate the extent of the risk and likelihood of occurrence

Question 3

Factors that affect the level of risk and uncertainty:

Answer 3

• Homogeneity of risks
• Non-independence of risks
• Changing risks
• Numbers of claims
• Claim costs
• Claim inflation
• Delay patterns
• Variability of experience
• Accumulations
• Fraudulent claims

Question 4

Exclusions are used to avoid payment by the insurer in situations where:

Answer 4

• Policyholder is at an advantage through possessing greater personal information about the likelihood of a claim
• Claim event is largely under the control of the policyholder
• Claim event would be very difficult to verify
• Loss occurs as part of the normal course of events and could be considered depreciation