Week 5

Question 1

What are the subject matters of insurance?

Answer 1

Properties
- buildings
- vehicles
-manufacturing stock and materials
-household furniture
- jewwellries

Rights
- citizenship rights
Interest
- business interruption

Life
- own and spouse

Limbs
- eyes
- hands
- legs

Potential liability
- employers’
- public

Question 2

What is the definition of insurance?

Answer 2

Risk transfer mechanism whre an individual/buisness (insured) shifts the financail burden of potential losses to an entity specialiing in risk management.

Question 3

Provide an example of how property insurance works?

Answer 3

• Homeowner purchases insurance policy to protect house against damages caused by fire etc.
• if the fire is damaged - claim can be riled
• insurer compensates them depending on the policy coverage

Question 4

Describe how insurance works in health insurance

Answer 4

• individual pays premium to insurance company
• insurer covers medical expenses in return if insured falls ill

E.g. policyholder undergoes surgery - insurance company pays for eligible medical costs reducing the financial burden on the insured.

Question 5

What does the insured pay?

Answer 5

Pays a sum of money (known as a premium) to the insurer as the price for transferring the risk

Question 6

What does the premium depend on?

Answer 6

Level of coverage, likelihood of insured event occurring, insurers underwriting criteria

Question 7

Does the insured have a right

Question 8

What is meant by the ‘Position of benefit or loss’

Answer 8

The insured must stand in a position whereby they will benefit from the wellbeing of the subject matter, but would be worse off by their loss or destruction.

Reinforces that the insured must:

Gain - if the item/person is safe and intact and

Suffer a loss - if the item/person is damaged or lost

Question 9

What is meant by ‘speculation prohibited’

Answer 9

Insurance cannot be used for betting or gambling

You cannot take out insurance hoping to profit from someone else’s misfortune

Question 10

Basic characteristics of insurance

Question 11

What is the pooling of losses?

Answer 11

• insurance works by collecting premiums from a large group of people
• when some of them suffer losses, the money collected from the group is used to pay for those issues
• this spreads the risk so no one bears the full cost of their loss
• it substitutes the average loss (a small premium from everyone) for the actual loss (which could be large if suffered alone)

Question 12

What is the payment of fortuitous (accidental) losses?

Answer 12

• Insurance only covers unexpected or accidental events, not loss that are intentional or expected
• A fortuitous loss is one that happens by chance - e.g. theft, a fire, unexpected illness

If someone could predict or cause the loss, it would be fraud not insurance

Question 13

What is ‘risk transfer & sharing’?

Answer 13

-when you buy insurance, you are transferring the financial risk of a loss to the insurer

• instead of facing a huge bill on your own - the insurer will cover the loss
• insurer is in a better financial position to absorb that loss due to pooling and reserves

Question 14

What is meant by indemnification?

Answer 14

Insured is compensated to return to their original financial position before the loss

Question 15

How does insurance create a common fund?

Answer 15

Insurance is when people share the cost of unexpected losses by paying into a common fund. The insurer takes on
these risks and agrees to pay money or provide help if a covered loss happens.

Policy holders contribute to the common fund by paying insurance premiums.

Question 16

What is the law of large numbers?

Answer 16

The greater the number of exposures, the more closely the actual results will approach the probabl results that are expected from an infinite number of exposures.

Larger numbers of similar exposures units make it easier to close the. Gap between anticipated and actual losses for the year.

This ability to anticipate loss makes it easier for the insurer to charge an insurance premium, which will be attractive to the policyholder and will allow the insurer to cover losses

Question 17

Draw out the risk pooling and diversification model

Question 18

Draw out the insurance business model

Question 19

What are the different types of insurance?

Answer 19

• general (non-life) insurance
  PROPERTY AND CASUALTY

Personal lines
- home
- motor
- personal liability insurance
- flood insurance

Commercial lines
- fire insurance
- employers’ liability insurance
- marine and cargo
- directors and officers liability insurance
- accident & health insurance
- aviation insurance

Life Insurance Investment
- whole life
- term life
- others

Government insurance
- social insurance
- NHS (UK), Medicare (USA)
- unemployment insurance
- disability insurance (social security)
- State pension

Catastrophic insurance
- multi-peril and multi-line insurance

Question 20

What do policyholders buy?

Answer 20

The promise (peace of mind)
- a gurantee that a valid claim will be paid under specified contractual terms and subject to the solvency i.e. financial soundness of the insurer

• the insurers expertise in the selection of the insurance pool, its organisations and administration.

Question 21

What is the insurers expertise?

Answer 21

Insurers expertise as an institutional investor.

Insurer revives premium payments before paying out on claims and therefore, has substantial sums available for investment. Insurers can use returns on investments to lower premiums.

Insurers gain insights from covering many similar risks (homogenous exposure units)

They offer guidance to clients through: consultancy, informal advice or contractual clauses

Question 22

What are the six legal principles of insurance.

Answer 22

(1) Insurable interest
(2) Utmost Good Faith
(3) Indemnity
(4) Subrogation
(5) Contribution
(6) Proximate Cause

Question 23

What is Principle 1: Insurable Interest

Answer 23

Legal right to insure arising out of a financial relationship, recognised at law, between the insured and the subject matter or insurance

Question 24

When must an insurable interest exist?

Answer 24

At the time of the purchase of the insurance

Question 25

What are the four essential ingredients must then be present for insurance interest to exist?

Answer 25

1. Subject matter of surance (i.e. asset, lability or life) capable of being insured 2. The insured’s relationship with the subject matter must be such that s/he benefits from the continued safety/existence of the asset 3. Whatever the nature of the relationship, it must be

Question 26

Give an example of an insurable interest?

Answer 26

To be legally enforceable - all insurance contracts must be supported by an insurable interest for the following reasons: - to prevent gambling - to reduce moral hazard - to measure the amount of the insureds loss in property insurance

Question 27

What is principle 2: Utmost good faith

Answer 27

It is a legal doctrine which governs insurance contracts

Question 28

What are the essential criteria for utmost good faith?

Answer 28

1. Both the parties should have faith over each other 2. Means all parties to an insurance contract must deal in good faith, making a full declaration of all materials facts in the insurance proposal 3. The principle of utmost good faith is supported by three important legal doctrines: repreesentations, concealments and warranty

Question 29

What is principle 2: utmost good faith?

Question 30

What is principle 3: indemnity

Answer 30

The principle of indemnity states that the insurer agrees to pay no more than the actual amount of the loss, stated differently, I the insured should not profit from a loss Purposes: * To prevent the insured from profiting from a loss * To reduce moral hazard

Question 31

What does indemnity mean?

Answer 31

Security or compensation against loss or damage A loss payment will replace what is lost - putting the insured back to where it was financially before the loss without rewarding or penalizing the insured for its loss.

Question 32

What is the insurance hard market?

Answer 32

- supply < demand Price (Premium): High Product Innovation: Low

Question 33

What are the characteristics of a soft insurance market?

Answer 33

Insurance products: Supply > Demand Price (Premium): Down Product Innovation: High

Question 34

What are the considerations of insurance?

Answer 34

1. Losses must be measurable in terms of money 2. A sufficient number of people must wish to insure 3. It must be possible to assess the extent of risk and a calculate a premium 4. The risk must be insurable at a reasonable premium 5. Losses must be within the capacity of the insurer to pay

Question 35

What are the benefits of insurance?

Answer 35

- protect individuals, businesses and society from financial losses that may arise from risks - insurance mechanism distributes and smooths the risk of losses amongst the population - by compensating the insured financially, the insurance helps to maintain the cash flow of the business venture - insurance often works as a gurantor of business transactions e.g. letter or credit - using excess (self insurance) insurance reduces the moral hazard - insurance is based on the principle of risk (loss) sharing - insurance (life insurance, in particular) promotes a saving culture in the society - insurance companies insolvency is rare

Question 36

What are the limitations of insurance?

Answer 36

- insurance only covers downside risk (pure) through indemnification but not upside (speculative) risks - insurance are sometimes expensive (affordability) and unavailability - insurance withdraws their product in case of catastrophe losses (bad claims experience) - only wealthy people can buy insurance. However, government supported insurance policies are also available (agricultural insurance) - concept of insurance is complex and may ordinary people do not understand the purpose of insurance and how insurance works - insurance does not support gambling behaviour - to develop insurance products, risk must be quantified in currency (pecuniary or monetary value) - insurance works better for homogenous risk

Question 37

What are the critical factors in transferring corporate risks to an insurance company?

Question 38

What are the factors influencing insurance purchase decisions?

Answer 38

Risk size, premium costs, policy coverage, insurer solvency

Question 39

What is risk size?

Answer 39

Size of risk and its impact on insurance decisions decisions - high severity, low frequency risks: large, catastrophic risks e.g. earthquakes, industrial fires and major lawsuits -low-severity, high-frequency risks: routine risks e.g. minor car accidents or short-term illnesses

Question 40

What is premium costs and affordability considerations?

Answer 40

- higher premiums for higher risks - cost vs risk trade-off - regulatory and market competition

Question 41

What is policy coverage and protection against specific risks

Answer 41

- comprehensive vs. basic coverage - inclusions and exclusions - claims process and payout terms

Question 42

What is insurer solvency and financial strength?

Answer 42

- risk of insurer default - rating agencies and financial assessments - reinsurance and risk management

Question 43

Provide an industry example of manufacturing industry - property and business interruption insurance

Answer 43

Scenario: A multinational automobile manufacturer has several production plants across different regions. One of its main factories is location in a flood prone area. Risk Management Intergration: Risk identification: the company conducts flood risk assessments and finds that climate change is increasing flood frequency. Risk mitigations: the company installs flood barriers and drainage systems to reduce potential damage Risk transfer: company purchases property insurance and business interruption insurance to cover physical damage and lost revenue. Continuous improvement: the organisation regularly reviews its insurance policies to adjust coverage as risk exposure changes.

Question 44

Example 2: Healthcare Industry - Cyber Insurance in Data Protection Strategy

Answer 44

Scenario: A hospital network experiences a ransomware attack, locking patient records and disrupting operations Risk Management Intergration: Risk Identification: The IT department conducts cybersecurity risk assessments and identifies vulnerabilities in data storage. * Risk Mitigation: The hospital implements firewalls, two-factor authentication, and employee training on phishing attacks. * Risk Transfer: The hospital purchases cyber insurance covering data restoration, regulatory fines, and reputational damage. * Incident Response Planning: The organization establishes a cybersecurity response team and a backup data recovery plan.

Question 45

Example 3: Logisitcs Industry — Supply Chain Disruption Insurance

Answer 45

* Scenario: A global shipping company faces supply chain disruptions due to geopolitical conflicts and strikes at key ports. * Risk Management Integration: * Risk Identification: The company monitors political risks, port strikes, and global supply chain vulnerabilities. * Risk Mitigation: The organization diversifies supply chains by sourcing from multiple suppliers and using alternative transport routes. * Risk Transfer: The company purchases supply chain disruption insurance, covering costs incurred from shipping delays. * Business Continuity Planning: The logistics firm develops alternative sourcing contracts to maintain operations in case of disruptions.

Question 46

What are the challenges of insuring cyber risks?

Answer 46

* Difficulty in Risk Assessment and Pricing * Highly unpredictable and difficult to quantify. * Lack of historical data and standardized risk models * Rapid Evolution of Cyber Threats * Hackers continuously develop new attack methods, such as zero-day exploits, artificial intelligence-driven cyberattacks, and supply chain vulnerabilities * Systemic and Catastrophic Cyber Risks * A single cyberattack can affect thousands of businesses simultaneously * Difficulty in Establishing Liability and Attribution * Cyber incidents often involve multiple actors and occur across jurisdictions. * cause and responsibility are difficult to determine * Regulatory Uncertainty and Compliance Issues * Cyber insurance policies must align with glo

Question 47

What are the limitations of cyber insurance policies?

Answer 47

* Coverage Gaps and Policy Exclusions * Acts of war and terrorism (e.g., cyberattacks by nation-states) * Pre-existing security vulnerabilities * Human error or negligence (e.g., employees falling for phishing scams) * Loss of future profits due to reputational damage * High Premiums and Coverage Limits * Delays in Claims Processing and Disputes * Unclear Definitions of Cyber Events