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Introduction to Insurance and Risk Management - Coggle Diagram
Introduction to Insurance and Risk Management
The Nature of Insurance Business
Insuring the unkown
Paying a fixed price to hedge an unknown.
Uncertainty of future and outcome.
Edward Lloyd
Entrepreneur
Became Lloyds of London
Insurance needs to respond to risk as they would become disregarded.
Characteristics of Insurable Risks
Fortuitous - unexpected/unkown
Financial - needs to be capable of having a financial value.
Pure Risk - can only result in a loss/theft
Particular - to a certain individual
Insurable Interest - need to have an insurable interest to be able to unsure an item - doesn't depend on ownership, but on responsibility
Not against public policy - must be legal.
Homogeneous Exposure
A large number of similar risks need to exist.
This will enable the necessary forecasting of the expected loss to assist underwriters in charging a commensurate premium.
Functions of Insurance
Risk transfer mechanism.
Common pool.
Equitable premium.
Money is put in an account from which things are paid - called a pool
Risk Transfer Mechanism
Insurance is a mechanism by which the financial consequences of a risk are transferred.
Uncertainty is converted to certainty.
Provides financial security
Common Pool
Contributions of many to pay the losses of the few.
Large number of similar events
Many people put money inside a pool from where a few will be eligible to receive a benefit.
Equitable Premium
Amount to be paid into the pool
Competition effects the preimum charged.
Benefits of Insurance
Peace of Mind
Helps in loss control - insurance is also suggesting ways of how to reduce wastage and minimal loss.
Social Benefits
Investment of Funds
Invisible Earnings
Underwriting Procedures
Underwriting - the way a risk is assessed to determine the insurer will insure it or not and at what price.
The
Role
:
Assess the risk brough to the pool
Decide whether to accept the risk or not or how much of the risk to accept
If willing to accept, calculate appropriate terms, conditions and scope of cover.
Calculate suitable premium to cover expected claims, reserve, expenses and profit.
Process
:
Identify the perils for which insurance is required
Check the general acceptability of the propser and risk
Identify the underwriting factors and EML.
Establish the type of risk and acceptance class,
Apply theacceptance limit for the class to EML.
Utilise Reinsurance.
Identify premium/rating factors
Calculate terms.
Make an offer.
Tasks of an Underwriter
The process of Underwriter
Stage 1 - Proposal Stage
Stage 2 - Bureaucratic/Administrative Stage
Stage 3 - Technical Stage
Stage 4 - Closure
The Underwriting Logic
Information required by underwriter - rating
Type of insurance cover
Trade/business and relevant processes.
Physical and moral characteristics.
Losses/Sums insured.
Types of losses
Time
Sources of Information
Client Records
Own Company
Market
Industry
National
European
International
Underwriting Considerations
Proposal form or any other related form of information
Hazards
Oremiums
Reinsurance/Co-Insurance
Considerations to Exposure
Single Risks
Aggregation of Single Event
Aggregation within a Policy Year
Hazards
Feature making it likely to trigger a loss
Physical - characteristics of the risk.
Moral - related to the behaviour and attitudes of human beings.
Good Hazards - likely to reduce the likelihood of loss.
Bad Hazards - likely to increase the likelihood of a loss
Action
Poor Moral hazards - usually declined.
Poor physical hazards may be accepted by following a certain terms or conditions like imposing excesses, loading premiums, imposing warranties.
Ways of Reducing Premiums
Premium Composition
Pure Risk
Expense
Reinsurance Costs
Commission
Investment Return
Loading
profit
Taxes/Documet Duty
Minimum Premium
Tariffs/Market Restriction
Competition
INterest Tates
Inflation
Exchange Rates
Marketing Strategy
Life Assurance Premiums:
Mortality
Expenses
Investment
Contingencies
Procedure
Quotation Given:
• Rate of premium to be charged.
• Terms of contract.
• Based on circumstances and material facts.
• Valid for a certain number of days.
• No cover at quotation stage.
• Insurer bound to accept quote unless circumstances change unlike proposer.
Proposal Made
Made by the propser.
Knows the nature of the risk.
Will have to describe the risk to the insurer.
Communicate requirements of type of policy and extensions.
Select policy to suit needs in respect of security, services and price.
Proposal Forms
Contract Parties
Proposer - one who is seeking insurance cover
Insured - onw who has enterd into an insurance contract.
Insurer - one who provides insurance cover.