Chapter 8 - General Insurance products

Question 1

What are the key features of general insurance contracts?

Answer 1

Short term contracts (normally only a year)

Can be multiple claims

Claim amounts are generally unknown and can be volatile

There are usually reporting and settlement delays

Question 2

What is a rating factor?

Answer 2

Factor used to determine the premium rate for a policy

• is measurable in an objective way
• relates to the likelihood and/or severity of the risk.

Question 3

Why is a greater level of underwriting needed for commercial lines than personal lines of product distribution?

Answer 3

More heterogenous risks leading to greater uncertainty

Larger sums at risk justify the greater underwriting expense

Question 4

Why might the actual premium charged be different to the calculated office/gross premium?

Answer 4

Office premium may be uncompetitive for new business.

New business premiums are usually subsidised with renewal premiums.
- Renewal/persistency rate assumption is therefore critical when pricing a general insurance contract.

Question 5

List some of the main reserves required by general insurers.

Answer 5

Outstanding reported claims reserve

Incurred but not reported (IBNR) reserve

Unexpired risk reserve (for claims that have not yet occurred in a future period of cover)

Catastrophe reserve

Claims handling expense reserve

Question 6

What features of a class of general insurance products contribute to its riskiness?

Answer 6

The potential tail of the claims

Sum insured/expected claim amount

Expected claim frequency

Claims volatility

Exposure to accumulations of risk or catastrophes

Volume of contracts sold and hence availability of data

Availability of reinsurance for that class

Question 7

What are the key risks for general insurers?

Answer 7

Claim risks

• frequency
• amount
• volatility
• delays

Accumulations of risk and catastrophes

Investment risks

Expense risks

Persistency risk

New business risk (too high volume or too low volume)

Credit risk

Operational risk

Question 8

What are the main ways to classify general insurance into different classes?

Answer 8

By target market:
Personal line
Commercial line

By class:
Liability
Property damage
Financial loss
Fixed benefits

Question 9

Discuss liability insurance.

Answer 9

Provides indemnity where the insured is legally liable to pay compensation to a third party due to negligence of some kind.
Would usually also cover legal expenses.
An illegal form of negligence may invalidate the cover.

Employers liability:
- Indemnifies insured against legal liability to compensate employee or their estate for exposure to harmful substances/working conditions, accidental bodily injury, disease or death suffered due to negligence of the employer.

Motor third party liability:
- Indemnifies owner of vehicle against compensation payable to third parties for death, personal injury or damage to their property.

Public liability:
- Insured is indemnified against legal liability for death of or bodily injury to a third party or damage to property belonging to a third party.

Product liability:
- Indemnifies insured against legal liability for death of or bodily injury to this party, or damage to property belonging to the third party due to a faulty product.

Professional indemnity:
- Indemnifies insured against legal liability due to negligence in the provision of a service.

Question 10

Discuss property damage insurance.

Answer 10

Indemnify policyholder against loss of or damage to material property.

Residential and commercial buildings insurance:

• Main peril is fire
• Also can insure against explosion, lightning, theft, storm and flood

Moveable property (e.g. household contents):

• Theft is the major peril
• Also fire, explosion, lightning, storm and flood

Motor property:

• Accidental or malicious damage, fire and theft are the main perils
• Typically provided with motor third party cover

Marine property and aviation:
- Main classes for marine property are marine hull (loss/damage to craft), marine cargo (contents of the craft) and marine freight cover (money payable for shipment)

Question 11

Discuss financial loss insurance.

Answer 11

Indemnity against financial losses arising from a peril covered by the policy.

Pecuniary loss insurance:

• Protects insured against bad debts or other failure of a third party
• Example is mortgage indemnity guarantee insurance

Fidelity guarantee insurance:
- Covers insured against financial losses caused by dishonest actions by its employees, such as fraud or embezzlement

Business interruption cover:
- Indemnifies insured against losses made due to not being able to conduct business for various reasons (which will be specified by the contract)

Cyber insurance:
- Protect against losses due to cyber risks such as hacking, phishing, worm attacks, viruses etc.

Question 12

Discuss fixed benefits insurance.

Answer 12

Benefits are specified fixed amounts determined at the onset of the contract.

Personal accident insurance:

• Claim occurs if insured party (which may include family) suffers the loss of one or more limbs, or another specified injury.
• Not indemnity because it is not possible to value the loss (e.g. of losing an arm)
• Grouped cover does exist

Health insurance:
- Provides money for medical treatment if needed

Unemployment insurance:

• Provides a lump sum/income stream (usually for no longer than a year) if insured is made redundant.
• Can use to maintain lifestyle and service debts while new employment is sought out.