Chapter 8 Flashcards
(21 cards)
What is GI
Any type of insurance that is not life insurance
indemnity? excess?
- The policy is a contract of indemnity – aims to reimburse any loss occurring (restore the insured to the same financial position after a loss as before the loss)
- Excess – the sum that insured must bear before any liability falls upon the insurer
- Key features of GI contracts
- Short term (annually renewable)
- Can be multiple claims
- Claim amounts generally unknown and can be very volatile
- Can be delays in reporting and settling claims
- GI contracts can be split into:
- Personal lines – contracts sold to individuals (underwriting done through proposal forms)
- Commercial lines – contracts sold to businesses(underwriting done through detailed reports from brokers, surveyors, fire officers etc. – greater underwriting needed here because there is greater level of uncertainty due to heterogeneous risks and larger sums of risks involved)
- Short vs long tailed business
Indicates the level of risk and the investment strategy that needs to be used to match liabilities - Short tailed – claims reported quickly and settled quickly by insurer
- Long tailed –sizeable proportion of claims take a long time to be reported and settled by insurer (delays due to: initial admin processing, determining if insurer is liable, waiting for a condition to stabilise, establishing how much must be paid and possible disputes and court settlements)
The longer the distance between the peril and the settlement, the longer the tail. Long
tailed business pose risks on the insurer such as reserving risk, inflation risk and expenses
and costs, deductibles (proportion of loss) and excesses (fixed amount)
Setting premiums
- Risk premium = expected claim frequency x expected cost per claim
- The amount required to cover the expected cost of claims
- Can use historic data to get the expected claims frequency and amount by fitting a distribution. Remove any distorting features from the past data. Past data can also be used to project the claims data
- Once risk premiums are determined they are adjusted to give the gross premiums allowing for loadings for commission and other expenses, profit, contingencies, investment income and the cost of reinsurance
- Reasons for having an excess:
- Reduces claims amount
- Reduces number of claims
- Eliminates small claims (saves expense costs)
- Encourages policyholders to be more careful an helps prevent claims
- Types of provisions
Outstanding reported claims reserve – for claims that the insurer knowns about, but have not yet been settled (run-off triangles e.g. chain ladder)
Incurred but not reported (IBNR) – claim events that have occurred, but the insurer does not yet know about
Unexpired risk reserve – claims that have not yet happened in a future period of cover
Catastrophe reserve – for catastrophes
Claims handling expense reserve
Unearned premium reserve (“UPR”) – reserve should be enough to cover the unexpired exposure (is a provision)
Unexpired Risk Reserves (“URR”) – this is a top up to UPR
Expense reserves for unexpired exposures
- Investment strategy of general insurers is constrained by factors such as:
- Regulation
- Size of free assets
- The need to be tax efficient
- Risks (that are accounted for in the capital)
- Market risk
- Credit risk
- Liquidity risk
- Business risk
- Reserving risk
- Operational risk
Key risks to a general insurer:
- Claims frequency, amount, volatility and delays
- Accumulation of risks (class of business/geography) and catastrophes
- Investment risk
- Expenses being higher than expected
- Poor persistency (high lapses and low renewals)
- New business volumes too high (new business strain) or too low (not enough to spread the overheads)
- Credit risk
- Operational risks (fraud, systems failure, regulatory changes)
Ways general insurer can mitigate these risks
- Reinsurance
- Underwriting
- Diversification over different classes of business or geographically
- Monitoring experience
- To set assumptions for premium rating
- Set assumptions for provisioning (runoff triangles)
- Assess profitability of company
- Assess reinsurance requirements
- Determine appropriate investment strategy
- Determine capital requirements
- Financial planning and strategy
Liability insurance (Prodding Electrical Points May be Painful) - key features:
- Compensation for negligence
- Legal expense usually covered
- Indemnity subject to statutory limits
- Fixed benefit in some cases such as bodily injury
- Cover is on indemnity basis – may be excess (payable by the insured) or maximum level of cover provided by the insured
- Types of liability insurance:
Employers’ liability – perils include accidents in the workplace due to negligence of the employer or employee, exposure to harmful substances / working conditions (Commercial lines)
Motor third party liability – perils include motor accidents caused by the insured (Personal and commercial lines – uber eats drivers)
Public liability – perils depends on the type of policy (dog bites, falling objects) (personal and commercial lines)
Product liability – perils include faulty design, manufacturing, packaging and misleading instructions (commercial lines)
Professional indemnity – perils depend on the profession of the insured (negligence in the provision of a service)
Property damage insurance (Rolling My Car May Lose me Auto-insurance)
- To indemnify the insured against loss of, damage to their own material property
- Cover is on indemnity basis – may be excess (payable by the insured) or maximum level of cover provided by the insured. Household contents insurance is frequently written on a new for old basis (not necessarily indemnity, more replacement)
- Types of property damage insurance:
- Residential building (structure) – perils include fire, explosion, lightning, theft, storm, flood (personal lines)
- Moveable property (contents inside the house but may be sold together with residential building insurance) – perils include theft and other perils a sper buildings insurance (personal and commercial lines) – new for old basis
- Commercial building – perils include fire, explosion, lightning, theft, storm, flood (commercial lines – size, severity, frequency)
- Land vehicle – perils include accidental damage, theft (personal and commercial lines)
- Marine craft – perils include perils of the sea, fire, jettison, explosion, piracy (personal and commercial lines)
- Aircraft – similar perils to marine craft but air based (personal and commercial lines)
Financial loss insurance (Peculiar Friend continuously interrupt Business)
- Indemnify against financial losses arising from a peril covered by the policy
- Cover is on indemnity basis – may be excess (payable by the insured) or maximum level of cover provided by the insured
- Types of financial loss insurance:
Pecuniary loss (credit insurance) – perils include bad debts or failure of third parties, include mortgage indemnity guarantee insurance (commercial lines)
Fidelity guarantee – perils include dishonest actions by employees, such as fraud and embezzlement (commercial lines)
Cyber insurance – protection against cyber risks (is not indemnity as it is difficult to understand severity and attach an amount to it)
* Business interruption (consequential loss) – losses due to not being able to conduct business. Perils include fire in the insured’s own property or in a neighbouring property
Fixed benefits insurance (Unemployed Healthcare workers Personalise Accidents)
- Does not operate on an indemnity basis. Provides a fixed amount instead.
- Types of fixed benefits insurance:
Personal accident – perils include loss of limb or other specified injury from an accident
Health (medical expenses) – perils include the need for treatment in a hospital
Unemployment – the perils is redundancy (lump sum or income stream, no more than a year)
Other insurance:
- Crop insurance
- Covers damage to a crop (indemnity – potential financial loss)
- Property related losses
- Climate insurance can be taken out for events such as droughts
- Pet insurance
- Fixed benefits
- Travel insurance
- Related to fixed benefits
Risk, rating factors and perils
- Risk factor: A factor that has a bearing on the amount of risk (The true underlying risk is often difficult to measure)
- Rating factor: Factors 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 is a risk factor or a proxy for a risk factor.
- Peril: a type of event that may cause losses, whether man-made or due to natural disaster.
