QA Bank Part 2

Question 1

income protection contract

Answer 1

Provides an income to individuals (and any covered dependents) while they are unable to work because of long-term sickness or incapacity due to accident or injury (within the terms of the contract).
the insured risks may also include unemployment.

Question 2

Critical illness contract

Answer 2

Provides a cash lump sum on the diagnosis of a “critical”illness, as defined by the policy.
It may be sold as a stand-alone product or as a rider benefit to, for example, term assurance.

Question 3

Long-term care contract

Answer 3

The contract can be used to cover, or help to cover, the cost of care in old age when individuals are no longer able to look after themselves.

Question 4

Types of perils associated with:

- employer’s liability insurance

Answer 4

• accidents due to negligence of the employer or other employees
• illness due to exposure to harmful substances
• injury or illness due to exposure to harmful working conditions

Question 5

Types of perils associated with:

- public liability insurance

Answer 5

• perils relating to policy type

- examples include dog bites, falling objects

Question 6

Types of perils associated with:

- product liability insurance

Answer 6

• perils depend on the nature of the product

- examples include faulty design, faulty manufacture, faulty packaging, misleading or incorrect instructions

Question 7

Types of perils associated with:

- professional indemnity insurance

Answer 7

• perils depend upon the profession

- examples include incorrect medical diagnosis, inappropriate legal advice, error in actuarial reporting

Question 8

Types of perils associated with:

- Marine hull cover

Answer 8

• perils of the seas and navigable waters
• fire, explosion
• jettison, piracy etc

Question 9

Types of perils associated with:

- pecuniary loss

Answer 9

• bad debts or failure of a 3rd party

- as an example is default on mortgage payments (under mortgage indemnity guarantee insurance)

Question 10

Types of perils associated with:

- fidelity guarantee

Answer 10

• dishonest actions by employees

- examples include fraud or embezzlement

Question 11

Features of a contract design that increase the financing requirement

Answer 11

UNCERTAINTY

• lack of historical data, and hence the need for greater margins in the provisioning calculation
• policyholder options, which increase uncertainty involved, and hence the provisions
• without-profit designs with non-reviewable premiums, due to the guarantees involved
• regular premium designs

HIGH COSTS:

• high initial expenses
• high initial commission
• high overheads, eg development expenses
• high guarantees, which increase the provisions

Question 12

Factors to consider when designing a financial contract

Answer 12

• customer needs and interests
• characteristics of other stakeholders involved in contract design
• risk apetite of the parties involved
• the level and form of the benefits
• options or guarantees
• discretionary benefits
• benefits taken early / discontinuance benefits
• contract terms and conditions
• profitability
• marketability
• competition
• statutory / regulatory requirements
• financing requirements
• premium / contribution pattern
• charges vs expenses
• extent of cross-subsidies
• consistency with other contracts
• administration systems
• accounting implications

Question 13

Key rating factors for:

- employers’ liability insurance

Answer 13

• payroll
• number of employees
• Type of industry
• Exposure to hazardous chemicals / products / processes
• past claims experience
• location
• size of excess

Question 14

Key rating factors for:

- residential building insurance

Answer 14

• sum assured
• number of rooms / bedrooms
• age and gender of policyholder
• owner or tenant
• age of building
• construction of building
• past claims experience

Question 15

4 Possible moral hazards in household insurance

Answer 15

• engineering “accidents” to old/broken items and claiming full replacement
• acting carelessly (leaving windows open / house unlocked)
• carrying more cash / valuable items around
• arson