Insurance products: background

Question 1

• For a risk to be insurable: (9)

Answer 1

o The policyholder must have an interest in the risk being insured
o A risk must be of a financial and reasonably quantifiable nature
o The amount payable by the insurance policy in the event of a
claim must bear some relationship to the financial loss incurred
o Individual risk events should be independent of each other
o The probability of the event should be relatively small
o Large numbers of similar risks should be pooled to reduce the variance of the average claim size and hence achieve more certainty
o There should be an overall limit on the liability undertaken by the insurer
o Moral hazards should be eliminated as far as possible because they are difficult to quantify
o There should be sufficient existing statistical/ information

Question 2

o Uberrima fides

Answer 2

Means the ‘utmost of good faith’, this honesty principle is assumed to be observed by the parties to an insurance, or reinsurance contract.

Question 3

o Underinsurance

Answer 3

when you have underestimated the value of your belongings

Question 4

o Average method

Answer 4

if the sum insured is less than the full value of the property at the time of a loss, the insurance payment will only be a proportion of the value of the loss (the same proportion as the sum insured bears to the full value)

Question 5

o First Loss insurance

Answer 5

a form of insurance cover for which the chosen sum insured is restricted to a figure less than the full reinstatement-as-new value of the property

Question 6

o Subrogation

Answer 6

the insurer replaces the policyholder in law and acquires all rights and responsibilities in legal matters regarding the loss suffered, be it before or after the claim has been settled

Question 7

o Discovery period

Answer 7

is a time limit, usually defined in the policy wording or through legislative precedent, placed on the period within which claims must be reported

Question 8

o Underwriting

Answer 8

is the process of consideration of insurance risk on individual policies, this includes assessing whether the risk is acceptable and if so the appropriate premium, together with terms and conditions of the cover

Question 9

o Losses-occurring policy

Answer 9

provides cover for losses occurring in the defined period no matter when they are reported

Question 10

o Claims-made policy

Answer 10

Covers all claims reported to an insurer within the policy period irrespective of when they occurred

Question 11

Factors that affect the level of risk and uncertainty include:

Answer 11

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