Insurance Products 1

Question 1

In order to have an insurance product, it is necessary to have:

Answer 1

• Insurable interest

- Insurable risk

Question 2

Defn of insurable interest

Answer 2

• Policyholder must have an interest in the risk, to distinguish between insurance and a wager

Question 3

Defn of insurable risk

Answer 3

• Policyholder has insurable interest
• Financial and quantifiable risk
• Sufficient data to be able to quantify the risk ideally
• A limit on the liability to the insurer
• The probability of an event should be relatively small
• Risks should be independent of each other ideally
  (usually not the case, might have aggregations)
• Large volume of risks so that risk pooling can be achieved (to reduce variance & increase certainty)
• Moral hazards should be avoided
  -> Results in selection to insurer and unfairness to
  other p/hs

Question 4

Policy document characteristics;

Answer 4

• Legal and binding contract
  
  • > Policy wording
  • > Terms and conditions
  • > When claims will be paid
  • > How much will be paid
  • > Exclusions - limits circumstances when claims paid

Question 5

Types of cover include:

Answer 5

• Liability
• Property damage
• Financial loss
• Fixed benefits
• Policy may provide more than one cover

Question 6

Features of each type of cover:

Answer 6

• Benefits to be paid (size and form)
• Peril insured against (events that cause losses)
• Measures of exposure (MoE) for example:
  
  • > employer liab - turnover, no. of employees
  • > motor cover - vehicle year is a proxy for exposure
• Claims characteristics
• Basis for cover

Question 7

Claims characteristics include:

Answer 7

• Variation in size of claims/frequency
• Delays in originating/notifying
• Delays in settling
• Propensity to reopened claims
• Vulnerability to accumulation of risk
• Likelihood of fraudulent claims

Question 8

Types of benefits:

Answer 8

• Amount paid on claims
  o Lump sum
  o Indemnity

Question 9

Different bases for cover and their definitions:

Answer 9

(1) Losses-occurring -> covers all claims ORIGINATING (incurred) during cover period
(2) Claims-made -> covers all claims reported during cover period. Reduces insurer liability for latent claims

Question 10

What is a Measure of exposure (MoE) and what qualities should an MoE have?

Answer 10

• Measures that give an indication of how much risk there is in a policy

- MoE should satisfy the following:
   o Proportional to risk
   o Objectively measurable
   o Easy to measure
   o Verifiable
   o Cannot be manipulated

Question 11

What are the consequences of not using proper MoE?

Answer 11

• Leaves insurer open to selection

Question 12

What is selection?

Answer 12

• Arises when insurer charges inaccurately for risks

Question 13

Risk factors

Answer 13

• Risk factors affect size/frequency of claims

motor eg. skill of the driver, safety of car, risk of theft

Question 14

Rating factors

Answer 14

• Used to determine insurance premium amount
  o Based on past claims experience
• Risk factors which are measurable
• Could also be proxies to risk factors

motor eg. location, make of car

Question 15

How does insurer’s risk vary by class of business?

Answer 15

• Homogeneity of risks
  o Homogeneous risks vary less wrt size & frequency
  o Same rating factors => more homogeneous
• Level of independence of exposures
• Changing risks
  o Risks may change over time, changes should be
  reflected in premiums
• Claim characteristics of the business

Question 16

Liability insurance defn:

Answer 16

• Provides INDEMNITY (restores p/h to initial financial position before the claim occurred)
• Arising from p/h’s negligence
• P/h legally liable to compensate 3rd party
• Indemnifies p/h against financial loss subject to:
  o Maximum amount
  o Excess (doesn’t apply to the 3rd party’s payout)
• After benefits paid, policy may be cancelled or reinstated for additional premium depending on the type of policy cover
• Legal liability depends on the legislation