1. Insurance Principles

1. Insurance Principles

1. A - Risk and Insurance

   • Purpose and Nature
     • definition: undesired and uncertain event possibility of Financial loss Describe subject matter insured i.e. property, ship - describe perils insured i.e. Fire risk, theft risk
       • Building stock or Machinery - damaged or destroyed
       • Stock machinery Stolen from Premises or en route to shops after manufacture
       • Employee, visitor or consumer could be injured
       • Business shut down - building destroyed
       • Employees could be dishonest
     • Risk management
       • Assessment tools - ascertain level of Risk so as to accurately do something about it - minimise risks liklihood and potential severity
       • good Risk Management often results in reduced premium paid
     • mechanism for risk transfer in exchange for agreed sum of money (premium)
     • protect insured from Financial loss

2. B - Functions of Insurance

   • Secondary
     • large companies can avoid need to put money aside in case of loss occurring can invest .i.e expand business buy new shop
     • Insurers invest premium funds creates extra income which support commerce and iindustry
     • London export to world therefore creating contribution to UK income
     • creates employment
     • facilitates trade and enterprise i.e money lending institutions require proof of insurance
     • insurers provision of advise and assistance - surveys conducted - recommendations to client on improvements etc even if Risk not accepted
   • Primary
     • Spread losses
       • various premium contributions into pot
         • loss of few divided by many
           • Insurers knowledge and experience inpast claims and risks allow mor realistic calculations contributions / premiums
     • provide security - reduce insureds financial exposure
       • financial security encourages confidence in investing i.e new machinery knowing can be insured against loss /damage

3. C - What can be Insured

   • Uninsurable Risks
     • Category: Non - Financial
       • Heirloom - personally priceless
     • Category -speculative
       • aspect of profit and loss
     • Category - fundemental
       • so vast in scale i.e. catastrophic potential i.e famine, economic recession
         • exceptions on some earthquakes
       • WAR in non Marine
   • Insurable risks
     • Category: Financial
       • policies of Indemnity
         • compensate insured after loss
           • loss calculated after event
       • Accidental damage to car
       • of bracleel from house
       • loss of profit due to factory fire
       • injury to employee at work
         • employer legally liable
     • Category - Pure
       • risk of possibility of loss not profit
     • Category - particular
       • eg Factory Fire spreads to neighbouring buildings BUT NOT Community
       • domestic burglary impact only the family in that home
     • Fortuity
     • Insurable interest
     • not against public policy

4. D - Premiums

   • Basic methods of premium Calculations
     • consider
       • profit element
       • operating expenses contribution
       • actual Risk
         • level of exposure
           • client declares Sum would like insured
             • Insurer sets rate using sum insured
               • rate per cent 100
               • take into account hazard associated to particular risk
                 • greater hazard is viewed higher the premium
               • Rate per Mille 1000
       • provision for larger than expected claims
       • Staff salries
       • currency of premium
         • luctuations
           • future value/ exchange rate
     • Adjustable Premiums
       • not all insurance suit flat rate based on Sum Insured
         • Employers liability
           • uses payroll as base
             • premium paid at start policy
             • calculation done at end policy on actual payroll
               • premium then adjusted
         • Professional indemnity Insurance
           • often rated on fees earned
             • more work higher risk of loss
         • Life Insurance
           • actuarial tables identify
             • likely mortality
               • age group
               • healty history
       • Cargo insurance
         • minimum premium paid at inception
           • further premiums as an when Goods are shiped
   • PREMIUM = SUM INSURED x RATE
   • Gross
   • net
     • GROSS PREM - BROKERAGE AND OTHER DEDUCTIONS = Net Premium

5. E - Physical and Moral Hazard

   • relationship

6. F - Claims

   • What is meant by a claim
     • Claims Management basic features
       • importance Claims reserving
   • LLoyds 8 minimum standards
     • Managing Agents
       • philosophy
         • Claerly documented
           • communicated
             • reflected in management and organisation of company
       • have appropriate resources
         • skills
           • management controls
             • each class of business
       • adjusted and processed accurately
         • have regard to circumstance of claim
           • properly managed to conclusion
       • documents and information relevant
         • retained for appropriate period
       • reserving consistent timely, accurate results
         • account costs possible and indemnity potential
   • ex gratia payments