Chapter 8: General insurance products

Question 1

What are the key features of general insurance contracts?

Answer 1

1. They are short term
2. There can be multiple claims
3. Claim amounts are generally unknown and can be very volatile
4. There can be delays in reporting and settling claims

Question 2

List the different general insurance products

Answer 2

Liability classes
- employer’s liability
- product liability
- public liability
- motor third party
- professional indemnity

Property damage classes
- land vehicles
- marine
- aircraft
- residential buildings
- commercial buildings
- moveable contents

Financial loss classes
- pecuniary loss
- fidelity guarantee
- business interruption
- cyber security

Fixed Benefit classes
- Personal accident
- Health
- Unemployment

Question 3

What is the General Insurance split?

Answer 3

• 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 4

What is the difference between short- and long-tailed business?

Answer 4

• 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 5

Define a Rating factor

Answer 5

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 must, therefore, be a risk factor or a proxy for a risk factor or risk factors.

Question 6

How are profits determined for General Insurance Contracts?

Answer 6

+ 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 7

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

Answer 7

1. Outstanding reported claims reserve: For claims that the insurer knows about, but have not yet been settled
2. Incurred but not yet reported reserve (IBNR): For claim events that have occurred but which the insurer does not yet know about.
3. Unexpired risk reserve: For claims that have not yet happened in a future period of cover.
4. A catastrophe reserve: For, strangely enough, catastrophes
5. A claims handling expense reserve.

Question 8

List the key risks under general insurance contracts

Answer 8

1. Claim frequency, amount, volatility and delays
2. Accumulations of risk and catastrophes.
3. Investment risks
4. Expenses being higher than expected
5. Poor persistency
6. New business volumes too high and hence new business strain, or too low and not enough business over which to spread the overheads.
7. Credit risk
8. Operational risks

Question 9

Risk management tools used by general insurers

Answer 9

1. Reinsurance
2. Underwriting
3. Diversification across classes of business and geographically
4. Monitoring experience

Question 10

List several reasons for monitoring the experience.

Answer 10

• To set assumptions for premium rating
• To set assumptions for provisioning and to monitor the run-off of claims against expectations
• To assess the profitability of its business and the key components of profitability
• To assess reinsurance requirements and to monitor the adequacy of reinsurance
• To determine an appropriate investment strategy
• To determine capital requirements
• To assist with financial planning and strategy
• To provide management information
• To help with marketing new contracts

Question 11

Outline the features of liability insurance

Answer 11

Liability insurance provides indemnity where the insured, owing to some form of negligence, is legally liable to pay compensation to a third party.

Any legal expenses relating to such liability are usually also covered.

An illegal act of negligence will often invalidate the cover.

There may be a restriction on the amount of benefit payable to the insured.

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.

The claims are usually medium to long tailed and are likely to be real in nature

International or national laws apply, depending on the type of cover.

Question 12

Give the main reasons fo having an excess

Answer 12

• Reduces the amount of each claim
• Reduces the number of claims
• Eliminates the small claims and so results in expense savings
• Arguably encourages policyholders to be more careful and so helps prevent claims.

Question 13

List the perils covered by employer’s liability insurance

Answer 13

1. Accidents caused by negligence of the employer, in the course of employment
2. Exposure to harmful substances or harmful working conditions

Question 14

List the perils covered by motor third party liability insurance

Answer 14

1. Compensation payable to third parties for death, personal injury or damage to their property.

Question 15

List the perils covered by public liability insurance

Answer 15

1. 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.
2. The insured perils will related to the type of policy.

Question 16

List the perils covered by product liability insurance

Answer 16

1. Legal liability for the death of, or bodily injury to, a third party or for damage to property belonging to a third party, which results from a product fault.
2. The perils depend greatly on the nature of the product being produced, but includes:
   * faulty design
   * faulty manufacture
   * faulty packaging
   * incorrect or misleading instructions.

Question 17

List the perils covered by professional indemnity insurance

Answer 17

1. Legal liability resulting from negligence in the provision of a service, e.g. unstatisfactory medical treatment or incorrect advice from an actuary, etc.
2. The perils depend on the profession of the insured.

Question 18

Outline the features of property damage insurance

Answer 18

The main characteristic is to indemnify the policyholder. However, here the indemnity is against loss of, or damage to, material property.

The benefit is often the amount to indemnify the insured against the value of the loss or damage, at the time the incident occurs, subject to any limits or excesses.

Household contents cover is frequently written on a “new for old” basis, where new goods are provided to replace lost or damaged goods, whatever their age and condition.

Question 19

List the perils covered by household and commercial buildings property insurance

Answer 19

1. Fire is the principle peril.
2. Explosion
3. Lightning
4. Theft
5. Storm
6. Flood
7. Damage to the insured property caused by measures taken to put out a fire is also covered.

Question 20

List the perils covered by movable property insurance

Answer 20

1. The policy will define precisely what moveable property is covered by the insurance.
2. Theft is the major peril for moveable property.

Question 21

List the perils covered by motor property insurance

Answer 21

1. Accidental or malicious damage to the insured vehicle.
2. Fire
3. Theft

Question 22

List the perils covered by Marine property and aviation insurance

Answer 22

Specific to marine hull cover are the following perils:
1. Perils of the seas
2. Fire
3. Explosion
4. Jettison
5. Piracy

However, similar perils are covered for marine cargo, marine freight and aviation insurance.

“Marine hulle cover” refers to loss of or damage to the craft.
“Marine cargo” refers to the actual contents of the craft, whereas “Marine freight” refers to the money payable for shipment of the cargo

Question 23

Outline the features of financial loss insurance

Answer 23

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

Question 24

List the perils covered by Pecuniary loss insurance

Answer 24

1. Protects the insured against bad debts or other failure of a third party.
2. Mortgage indemnity insurance protects the mortgage lender against the risk that the borrower defaults on the loan and a loss is made by the lender due to the sale of the property not covering the outstanding liability

Question 25

List the perils covered by Fidelity guarantee insurance

Answer 25

1. Financial losses caused by dishonest actions by the insured's employees. 2. 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.

Question 26

List the perils covered by Business Interruption cover insurance

Answer 26

1. Losses made as a result of not being able to conduct business for various reasons specified in the policy.

Question 27

List the perils covered by cyber insurance

Answer 27

1. Protects against cyber risks 2. Cyber insurance can cover: * Pecuniary * Fidelity guarantee, and * Business interruption losses

Question 28

List the perils covered by Personal accident insurance

Answer 28

1. The insured suffers the loss of one or more limbs or other specified injury. *This is not indemnity insurance because it is not possible to quanitfy the value of the loss of, for instance, an arm.*

Question 29

List the perils covered by health insurance

Answer 29

1. Provides money for medical treatment. It is therefore indemnity insurance, however only part of the cost may be provided. Or benefits may be a fixed amount regardless of the actual cost of treatment, and this type of health insurance can then be included with fixed benefit insuraces. Hospital expense plans also exist, which pay a fixed amount for each day the patient is treated in hospital as an in-patient. Health insurance is therefore subject to the primary peril of the need for treatment in a hospital.

Question 30

List the perils covered under unemployment insurance

Answer 30

This provides a lump sum or an income stream, usually of no more than a year's duration, in the event of the policyholder being made redundant. Its purpose is to provide additional funds to mantain the policyholder's lifestyle and service any debts for a short period while new employment is sought