Insurance: Core Principles

Core principles of Insurance

• The manual details information collated from Chartered Insurance Institute course materials
• It was created for internal use and not to be distributed elsewhere
• The manual includes an overview of core principles, which are useful for an insurance knowledge test

Concept of risk and risk transfer

• Risk is defined subjectively, but universally contains an element of uncertainty, unpredictability, or danger
• Everyday risk decisions are informal, but significant potential for loss requires better measurement tools
• Individuals have widely varying risk perceptions
• Control over a risk factor influences risk perception
• Past exposure can inflate risk perception
• Risk measurement and risk management is a well-defined process
• Risk transfer is achieved via insurance
• Insurance is a risk transfer mechanism: the insurer accepts unknown future potential risk for an agreed premium
• Insurance replaces risk and uncertainty with a guaranteed premium cost

Definition of risk

• Risk may be defined as:
  • The possibility of an unfortunate occurrence
  • Doubt concerning the outcome of a situation
  • Unpredictability
  • The possibility of loss
  • The chance of gain (such as a hoped-for benefit from a gamble or investment strategy)
• Peril is the contingency that is insured
• "Risk" can be the thing or liability insured
• The underwriter will mean both the thing insured as well as the range of contingencies covered, when underwriting a risk

Attitude to risk

• Attitudes toward risk differ, ranging from risk-seeking to risk-averse
• Companies attempt to accurately evaluate risks as part of their risk management

Risk management

• Risk managers are increasingly common in commercial organizations
• Insurance is often purchased because it is compulsory, or because a party has financial interest in the item to be insured
• Commercial risk management answers 'How much will it cost if things go wrong?' and 'What are the chances of the risk becoming reality?'
• The focus of risk management is identification and treatment of defined risks and continuous development
• It should address all risks surrounding the firm's current, past, and future activities systematically
• Commercial risk management reduces loss potential, gives shareholders confidence, and provides risk quantification

Key steps in the risk management process:

• Risk Identification
  • Discovering existing and potential threats (insurable and not)
  • An Insurer becomes involved in helping to identify existing and potential risks
  • Insurers also play a role in risk control when they provide reports following a survey
• Risk Analysis
  • Evaluating past data to predict future risks
  • Insurers will look at many of the same elements when considering the rating of a risk.
• Risk control
  • Put actions in place to control, reduce, or eliminate risk
  • Elimination is most effective, but may be costly or impractical
  • The Cost of doing so must be reasonable compared to the cost of the feared event
• Controls include:
  • Physical control measures (locks)
  • Financial control measures (insurance or contracts)
  • Developing a good risk culture (employee education)
  • Detective controls detect errors or irregularities that may have occurred
  • Corrective controls correct errors or irregularities that have been detected
  • Preventative controls keep errors or irregularities from occurring in the first place

Insurer Assistance

• Insurers assist commercial policyholders in loss prevention and control
• They impose requirements and make recommendations designed to improve the risk, following the completion of a survey
• Insurers also offer risk management training, guidance, or other literature to help their policyholders avoid or manage risk
• Insurers use technological capabilities to actively manage policyholder risks like leak detection

Insurer Involvement

• Insurers research areas of loss prevention and control
• The Fire Protection Association conducts research, publishes rules, reports on processes and machinery, and sets sprinkler system standards
• The Motor Insurance Anti-Fraud and Theft Register combats fraudulent claims
• The Claims and Underwriting Exchange, Thatcham Research Centre, the National Fraud Database, the Insurance Fraud Register, and the Loss Prevention Research Council develop security capabilities
• Emergence of autonomous vehicles
• Fraud management and mitigation

Components of risk

• Gaining a deeper understanding of the meaning of risk requires looking at components which include: uncertainty, level of risk, peril and hazard

Uncertainty

• Uncertainty about the future is at the center of risk
• If you knew exactly what was going to happen, there wouldn't be any risk

Level of risk

• Insurer assessed risks in Frequency (how often) and Severity (how Costly)
• Frequency and severity is included in the insurers risk assessment, but the relationship between them varies
• Graph A-High frequency/low severity claims (predictable)
• Graph B- Low frequency/high severity claims (difficult to predict owing to their random nature)
• As one increases in prominence the other decreases, and vice versa
• Insurers bases decisions on the prudence it can accept on factors/relating frequency and severity
• Insurers have ways of dealing with a risk that exceeds normal acceptance limits

Peril and hazard

• Relates to cause of Loss
• Peril- Defined as what gives rise to a loss Hazards- Defined as Influences the operation or the effect of the peril Examples of Perils
• Explosion
• Lightning
• Collision
• Dishonesty Examples of Physical and Moral Hazards Storage of Dangerous chemicals bad Physical and Moral
• Construction of any buildings struck by the lightning
• relaxed attitude to the speed limit

Physical vs Moral hazard

• Physical dimension of the risk (Security Hazard)
• High the standard of construction, the better the physical hazard for fire and similar risk
• Moral hazard arises from the behavior (The driver's lack of care can increase the chance of an accident)

Categories of risk

• Financial vs Non financial (insurable if outcome measurable in financial terms)
• Pure vs Speculative risk (Only Pure risk insurable and can cause no possiblitiy of loss)
• Particular/Fundamental risk (Earthquake insurance has to be correct and classified as fundamental based on no great likelihood of loss)

Features of insurable risk

5 Features must be present present 1 The event against the policy must be fortuitous 2 Here must be insurable interest 3The act of not being insured the interest must not be against public policy 4 There must be homogeneous exposures 5 Insurance has been meeting this need for along time, it has its origins in the situation where financial protection is required.

Benefits of insurance

• Benefits to policyholders and all benefits to insurance
• Cash flow
• Social Benefits
• Expansion of business
• premium can be invested
• Loss Control

Pooling of risks

• Loses are met contributions the many
• Insurance company collects small sums of protection from similar kinds of perils
• Insurer operated a common pool contributions go in the form of premiums

Law of large numbers

• Insurance enables the insurer to charge a fixed premium so that the people are charged with a fixed premium
• Competitive pressures and business imperative to put grow or defend market in the premium that puts forwards the client

Equitable premiums

• To operate a pooling risk to be set up for Main Group risks Main group has to be prepared to make a fair and equitable contribution to the pool
• When decision on equitable premiums, insures take into account the amount that is brought to the pool ( known as discrimination factors) Arriving at a premium is extremely complex and the correct assessment of the process is extremely important
• This will ensure that fair profits are made and the fair premium is charged and fair profits are made

Gender Directive

• EU Gender Directive-Insurers can no longer use gender as premium calculation tool or in determining benefits
• Transposed into UK Law by the Equality Act 2010
• Motor Insurance
• Life insurance
• Private medical insurance
• .income insurance
• Antuities

Co insurance

• A job can come together and from a pool in agreement and certain risks this is known as reinsurance terrorism and earthquake An Insurer May decline insurance risk and find are way to share risk with others from doing this the principal risk if the coinsurance

Risk sharing between insurers

• Co insurance risk mechanism sharing mainly applies in the London market, insurer agree rating and issue collective policy

Risk sharing with the insured

A small fixed sum that retained is called access but last sum called the deductible

Self insurance

Induvial or company had decided not to insurance but can carry the risk self’s they set it

The insurance market

• Global market with insurance buyers and sellers with every part of the world
• Some restrictions, parts of the world that require domestic or authority to insure risks within their countries
• The chain will be placed in the same territory and the insurers will retain every claim and that is what makes each risk different Complicate Factors insurance
• Elements straightforward risk become part of international agreements
• Share risk parties- companies with multiple presence will have in there are insurance companies
• There must be all elements communication between everyone , so the information can get to both insurer and intermediaries

Market Structure

• Insured Insurers Intermediaries comparison websites Reinsurance

5 types of buyers

• Private individuals-high is in demand , must be a major item of expenditure for individuals
• Companies-range extends from to a million pound spending premium self employed who work are also included but are limited liability companies.
• Partnerships- are not legal existence but each partners is liable in the medical and legal profession’s
• Public bodies
• Charities

Insurers

• Any company that transact insurance in the UK must authorized by the pra and fca
• Pra needs to be satisficed applicant with EU legislation and where applicable, insurers are required to maintain a defined solvency management
• Insurers made distinguished to one another in terms of ownership and function The Fca makes sure that relevant markets function well which includes an ensures play the insuring market place Different categories of ownership include proprietary companies mutual companies protected cell and Lloyds
• Proprietary companies- shareholder have in common limited, some many also choose to corporate under a brand etc

mutual vs mutual indemnity association

• in contrast to proprietary companies, mutual companies owned by the policyholders who share In the company by premium, mutual are limited by guarantee with the policy holder responsibility to pay premium The mutual indemnity association sell managed pools of insurers similar to mutual and insurance and also owned y policy holders who Are active In marine insurance called, an also possibility depending overall

Captive insurers and protected cells Captive is an insurance company established by parent company group that provide insurance, usually to tax efficiency protected cell companies- that ring fence assets of participation allow into a special single legal entity

Takaful and state

• specialist that deals with an increase income from profits State-To legislate insurance but will guarantee from the insurance center

Loyds Structure and featues

Lloyds is not an assurer but is a marketplace and world renown insurance brand without the provision of assurance. Loyd's is a society that the organisation provides the infrastructure of the place with all Dual regulate to make manage both the CA The Fca broker in a market select

Intermidaries

• are groups investors who has a day today running of insurance to these agent with people Managing agent , dual has to get approved activities
• Capital use for investment by members in 1994 had a rebuild through insurance called EQITA’S
• member agents ADVISE NAMES AND INDIVIDUALS the advantages and disadvantages of involving in Lloyd’s market and syndicate selection performance communication and the profit
• Broker the broker in London market broker to transact business in Lloyd s market reform- summary of risk to set condition with Market Reform Account the Nature and content Subscription
• The Broker approaches and all are accept percentage share this sharing with a number of brokers insured is subscribed understand underwriting Once fully place into a certain and is submitted electronically and access with sure services the underwriters agree broker deduct premium certain percentage it called Bokerage and transmit is electronic

London Market and contract certainty

Lloyds is a part of insurance worldwide and is a place where more complex industrial risks come from and are insured

• To provide Contract Certainly meaning parties are ware of the policy covering terms Contract Certainty is a
• details acontract what has been agreed
• The final share of risk that has agreed from insuer and underwriters records soon as possible
• Providing doc with 30 calendrr and 7 worikinf days

Intermediaries

Intermedisry- brings the 2 parties together, they include independent, legal they perform action that is 3rd party

• Fca is regulated through insurance and contacts from individuals and exempt , it must adopt by a status or appointed to those 3rd parties

Authorised perosn- authorized by fc to apply of application of regulated

Appoint representative - they have set terms of the business , The contracts is setting the role in the business and responsible’s

An introducer appointed- is marketing channel for insurance no advice but can distribute marketing forms and is a marketing tool

broker and insurance and service

Market independent means clients in business, where business has to be placed Independent intermediary is to

• Make a decision for what the market may be
• Negotiate terms and the initially condition
• provides client wth details in the plicy wording advice and advise them on the validity of the claims The services provided by intermediaries on terms of the authority could be collectium payment settling claim son half the inssuers, in certain situation in order for that it has to make sure that they can go through a specific rannge of productrs within a 3rd partys range

Consolidation of insurance

• Broker networks in this where retain brokers ownership from 3 services and to access centralized facilities
• Some can make a formal alliance gain more favorable terms from the insurers to make to get sales Comolidatiors where that have high preferntila rates and make significant sector change they have business and the inunderwrting agencym

Insurance marketing

Decisions involve product price , process ( marketing mix ) channel determine advertising, impacting cost Distribution- determines advertising impacting cost Direct- Employees of insurer sell products using direct mailing techniques indirect- Intermediaries are paid by insurer to promoted products on behalf

Indirect marketing

From a insurers way there are many reasons for indirect way for marketing so these include incentive to so they would have in relations to action or actions

Price comparison and insurance website

Website used extraction tools to get price and range from the other stores to get pricing from different risk Changed the way insurance market changed Critics stated for it it takes time and effort to be accurate will affect the results that are on the site

Types of reinsurance, and how do they influence the overall market.

Just as individuals and corporations need to transfer risk, so too do insurers; they are specialists on the accepting business and they are known to reinsurers in the original written to insurers. May be on individual risk or a portfolio. Purpose of to increase and manage at which the insurance can accept. This makes placing risk easy to protect loss,

Insurances profession

• UNDERWRITER- A common pool that a contribution to a many and lost from it task to provide manage as effectively as possible

• The key of the underwrite can also be, and a person in the insurance company

• CLAIMS PERSONNEL-The department, staff by profession helps to ensure proper funds. The role of claims personnel

• Deal effectively and fairy claims

• Determining all reality to claims, prior to determining payment, determining involvement

• Settlement with minimum is wastage expenses

• LOSS ADJUSTERS - They are experts in providing claims process and act for these insured

• LOSS ASSESSORS- expert in dealing with insurance and act or insured and policy holder to do negotiating and preparing

• SURVEY and FORESTRY- forendic analysis is to find out supporty for physical evidence determine cause of loss or damage

• ACTuaries and acturial sciences- to use practice with statical management

• Risk Management To systematic analyze with economic or controlling of risks and protect business

• Provide guidance to management in practice , transfer identiftied risk ( contract or insurance) Under Solvency 2 a firm is said to be with that

Compliciance Officer

the PRA and FCA must follow certain management in a sector To abidate from regulations to the Fca handbook

Internal Auditors also help the reliable financial reporting

• The main focus of MArket organizations
• The abi is part of the insurance market and forms codes and practice and publicity that also confers with other goverments
• BIba, is trade Association for intermediaries and has all regulatory laws Lma. Provides technical and service to the agencyies to the Lloyds market to identify interest 5

The market

Iua- is is responsinle for the member representitves that are the largest

Classes of the Insurance

Commercials lines that are not insured and do not take to the responsity of what haooens

personal line insurance from loss or damages to personal liabilirt

To pay taxes- it must be added wit h12 precent and or 20% depending on what insurances Motor Vehicle -The Vehicle in the uk

Homie Insuraace

Health Care

Personal accident- cover for death , or accidental injury Sickness- Cover for can’t work due to sickness Private Meidca- Treament outside the Nhs for health Pecuniary Insurance Credit, legal expansive ,

General and Marine

Marine insurance cover , or damage for all aircraft in a marine transport Aciariont insueed

Combined

A combination of packaging insures you for your different situations

3 Contract and Agency

England has three sources, cases by court judgments, customs and the EU The Claim for it is the party who brings court in to the defendant

A1- THE ESSENTIAL OF AN VALID CONTRACT OFFERA AND ACCEPT,CONSIDERATION Contract Certainty to ensure they aligined

AGENCY AND PRINCIPAL CONCEPTS

UNDER THE FCA< AN AND 3RD PARTIES

Principal > Agency >3rd parties

An a and r does not need written to apply only when client has a service

An agency relationship:

• Agreement

• necessity ->>Retifcation If agency can go bankrupt they may be terminated

##Consumer Protection

data

the information for to make the information from their with and this is for who are working properly.

legal requirments

• the Fca is a regulation from the sector they have all regulation they need to follow with in that to ensure the high quality

complaints have to be taken care and there cannot bve from inbalances

Comolaint must havr good procedures and and to aoprpaitaely trainned in

the FINICAL OMBUDSMAN SERVICE must inlcude the compalints to enabel the FOS.