Chapter 8: General Insurance Products

Question 1

Define indemnity, and give examples of where insurance does not fully indemnify the policyholder

Answer 1

Indemnity is compensation/reimbursement for a loss incurred. The idea is to return a policyholder to the same financial position they were in before the loss event.

Examples of non-indemnity insurance include:

• Fixed benefit insurance
• Insurance where there is an excess or a maximum claim
• “New-for-old” insurance (you’ll be given the equivalent value of the item that has been lost, damaged or stolen)

Question 2

List the four generic groups of general insurance products

Answer 2

1. Liability
2. Property damage
3. Financial loss
4. Fixed benefit

Question 3

Outline the seven features of liability insurance

Answer 3

1. Provides indemnity where the insured, due to some form of negligence, is legally liable to pay compensation to some third party
2. The legal fees associated with the claim are usually also covered
3. Illegal acts of negligence will invalidate the claim and no payment will be made by the insurer
4. There may be an upper limit (per claim or aggregate per year) and/or excess amount applied to the claim
5. 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
6. The claims are usually medium to long tailed and are likely to be real in nature
7. International or national laws apply, depending on the type of cover

Question 4

List the products covered under Liability Insurance

Answer 4

1. Employers’
2. Motor third party
3. Public
4. Product
5. Professional indemnity

Question 5

Employers’ Liability

Answer 5

The insurance indemnifies the insured against the legal liability to compensate the employee or their estate for accidental bodily injury, disease or death suffered, owing to negligence of the employer, in the course of employment

Perils covered:

1. Accidents caused by negligent actions by the employer
2. Exposure to harmful substances
3. Exposure to harmful working conditions

Question 6

Motor third party liability

Answer 6

Indemnifies the owner of a motor vehicle against compensation payable to third parties for death, personal injury or damage to their property.

In most countries, such cover is compulsory, with or without an upper limit on the amount of compensation.

The cover provided may or may not be limited to that required by legislation

Question 7

Public liability

Answer 7

The insured is indemnified against 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

This cover will form part of many insurance contracts. The insured perils will relate to the type of policy. For example a dog bite may be covered by a household policy, while injury from a falling object may be covered by a commercial policy

Question 8

Product liability

Answer 8

Indemnifies the insured against 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

The perils depend greatly on the nature of the product being produced, but include:

• faulty design
• faulty manufacture
• faulty packaging
• incorrect or misleading instructions

Question 9

Professional indemnity

Answer 9

The insured is indemnified against legal liability resulting from negligence in the provision of a service, eg unsatisfactory medical treatment or incorrect advice from an actuary, solicitor, etc.

The perils depend on the profession of the insured. Examples include wrong medical advice and errors in the medical report

Question 10

List the products covered under Property Damage Insurance

Answer 10

1. Residential buildings
2. Commercial buildings
3. Movable products
4. Land vehicles
5. Marine craft
6. Aircraft

Question 11

List the perils covered by buildings insurance

Answer 11

1. Mainly Fire, but can also cover
2. Explosion
3. Lightning
4. Theft
5. Storm
6. Flood

Damage to the insured property caused by measures to put out a fire is also covered

Question 12

List the perils covered by movable property / contents insurance

Answer 12

1. Fire
2. Explosion
3. Lightning
4. Theft
5. Storm
6. Flood

THEFT is the major peril

Question 13

List the perils covered by marine hull cover

Answer 13

1. Perils of the sea (or other navigable waters)
2. Fire
3. Explosion
4. Jettison (drop something)
5. Piracy

Question 14

List the perils covered by motor property cover

Answer 14

Accidental and malicious damage to the insured vehicle, and fire or theft of that vehicle

Question 15

List the products covered under Financial Loss Insurance

Answer 15

1. Pecuniary loss
2. Fidelity guarantee
3. Business interruption
4. Cyber security

Question 16

List the perils covered by pecuniary loss insurance

Answer 16

1. Bad debts
2. Third party failure

Question 17

List the perils covered by fidelity guarantee insurance

Answer 17

1. Dishonest employee actions
2. Fraud
3. Embezzlement

Question 18

List the perils covered by business interruption insurance

Answer 18

1. Being unable to conduct business

Question 19

List the products covered under Fixed Benefit Insurance

Answer 19

1. Personal accident
2. Health
3. Unemployment

Question 20

List the perils covered under personal accident insurance

Answer 20

Accidents resulting in loss of limb(s) or other specified injury

Question 21

List the perils covered under health insurance

Answer 21

Need for treatment in a hospital

Question 22

List the perils covered under unemployment insurance

Answer 22

Redundancy

Question 23

4 Key features of General Insurance Contracts

Answer 23

1. Short term (typically one year contracts)
2. Multiple Claims
3. Claim amounts are UNKNOWN and VERY VOLATILE
4. Delays in reporting and settlement of claims

Question 24

Reasons reporting delays occur

Answer 24

The time between an event occurring and the condition emerging eg for industrial diseases such as asbestosis

• The time taken for the policyholder to advise the insurer - possibly because the amount involved is quite small, or because they do not realise there is cause for claiming

Question 25

Reasons for settlement delays

Answer 25

- initial administrative processing - establishing whether the insurer is liable - waiting for the condition to stabilise (will the insured recover or is the disability permanent) - establishing how much should be paid - possible disputes and court settlements

Question 26

Define a Rating Factor

Answer 26

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, therefore, must be a risk factor itself or a proxy for a risk factor(s).

Question 27

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

Answer 27

1. Outstanding reported claims reserve. 2. IBNR reserve. 3. Unexpired risk reserve. 4. Catastrophe reserve. 5. Claims handling expense reserve.

Question 28

8 Key risks under general insurance contracts

Answer 28

1. Claim frequency, amount, volatility and delays. 2. Accumulations of risk (geographical & by class of business) and catastrophes. 3. Investment risks. 4. Expenses higher than expected. 5. Poor persistency (high lapses, low renewals). 6. New business volumes too high or too low (too high = new business strain; too low = not enough business to spread overhead expenses across) 7. Credit risk (reinsurer or broker) 8. Operational risk (fraud, systems failure, regulatory changes)

Question 29

Risk Management Tools used by general insurer.

Answer 29

1. Reinsurance. 2. Underwriting. 3. Diversification across classes of business or geographically. 4. Monitoring experience (claims & expenses)