Tag: Principal of General Insurance Osmania University B.com Notes

Proposal form is the basis of the Insurance contact between the Insurer and the insured. The details filled in the insurance proposal form is critical for the company to accept or reject the policy.

When anyone applies for an insurance policy, the proposer who is the payer or life to be insured in the Insurance policy fills the proposal form. This is the most important document which provide the complete details of the proposer and the life to be insured in the policy. Based on the information provided in the document the company will evaluate the risk to be insured and decide the premium rates applicable. They may also decide the condition on which the company is ready to accept the risk.

Proposal Terms

1. Name

Name of proposer is very important for identification. It should be correctly and accurately written so that the policy can incorporate the correct name and identity.

2. Address

Address should be accurately given because of several reasons, such as, identity and communication, and sometimes this is important for rating purpose, e, g., motor, burglary etc.

3. Occupation

Information as to occupation is particularly important in case of life insurance, personal accident insurance and liability insurance as this will influence the rate or decision of an underwriter.

4. Subject-matter

This is the subject-matter of insurance and, therefore, should be properly described so that correct insertion can be made on the policy.

5. Sum-insured

The amount for which insurance cover is required should be adequately mentioned.

This is the limit of the insurer’s liability. It must represent the actual value of the property or the subject-matter of insurance.

6. Claims History

This has an influence on underwriter’s decision and must, therefore, be truthfully answered. Details of all previous related losses, whether insured or not, must be correctly given.

7. Other Insurances

Information as to other past or present related insurances is required to be given. This is important for applying contribution amongst various policies wherever applicable.

This is also important for assessing the moral hazard of the proposer since it might indicate the reason for effecting numbers of policies. Information as to other insurances also enables the insurer to make necessary queries with other insurers about the proposer.

8. Declinature

The insurer would like to know whether any insurance of this proposer was previously declined by any other insurers. This information would enable the insurer to find out from other insurers the cause of declinature.

9. Declaration

Every proposal form contains a declaration to the effect that;

The answers given in the proposal form are true and nothing has been concealed or misrepresented.

The proposer agrees to pay the premium and accept a policy that is usually issued by the insurer for that class of business.

The proposal form and the declaration shall form the basis of the contract.

10. Signature

The proposal is required to be signed by the proposer or by the authorized person when the proposer is not an individual.

11. Date

The signature is to be dated.

By comparing various specimen proposal forms the students would realize that apart from the above common type questions, there are numbers of other types of questions peculiar to various branches and different policies.

Liability Insurance

The term liability insurance refers to an insurance product that provides an insured party with protection against claims resulting from injuries and damage to other people or property. Liability insurance policies cover any legal costs and payouts an insured party is responsible for if they are found legally liable. Intentional damage and contractual liabilities are generally not covered in liability insurance policies. Unlike other types of insurance, liability insurance policies pay third parties not policyholders.

Liability insurance (also called third-party insurance) is a part of the general insurance system of risk financing to protect the purchaser (the “insured”) from the risks of liabilities imposed by lawsuits and similar claims and protects the insured if the purchaser is sued for claims that come within the coverage of the insurance policy.

Originally, individual companies that faced a common peril formed a group and created a self-help fund out of which to pay compensation should any member incur loss (in other words, a mutual insurance arrangement). The modern system relies on dedicated carriers, usually for-profit, to offer protection against specified perils in consideration of a premium.

Liability insurance is designed to offer specific protection against third-party insurance claims, i.e., payment is not typically made to the insured, but rather to someone suffering loss who is not a party to the insurance contract. In general, damage caused intentionally as well as contractual liability are not covered under liability insurance policies. When a claim is made, the insurance carrier has the duty (and right) to defend the insured.

The legal costs of a defence normally do not affect policy limits unless the policy expressly states otherwise; this default rule is useful because defence costs tend to soar when cases go to trial. In many cases, the defense portion of the policy is actually more valuable than the insurance, as in complicated cases, the cost of defending the case might be more than the amount being claimed, especially in so-called “nuisance” cases where the insured must be defended even though no liability is ever brought to trial.

Types

In many countries, liability insurance is a compulsory form of insurance for those at risk of being sued by third parties for negligence. The most usual classes of mandatory policy cover the drivers of motor vehicles (vehicle insurance), those who offer professional services to the public, those who manufacture products that may be harmful, constructors and those who offer employment. The reason for such laws is that the classes of insured are deliberately engaging in activities that put others at risk of injury or loss. Public policy therefore requires that such individuals should carry insurance so that, if their activities do cause loss or damage to another, money will be available to pay compensation. In addition, there are a further range of perils that people insure against and, consequently, the number and range of liability policies has increased in line with the rise of contingency fee litigation offered by lawyers (sometimes on a class action basis).

Public liability

Industry and commerce are based on a range of processes and activities that have the potential to affect third parties (members of the public, visitors, trespassers, sub-contractors, etc. who may be physically injured or whose property may be damaged or both). It varies from state to state as to whether either or both employer’s liability insurance and public liability insurance have been made compulsory by law. Regardless of compulsion, however, most organizations include public liability insurance in their insurance portfolio even though the conditions, exclusions, and warranties included within the standard policies can be a burden. A company owning an industrial facility, for instance, may buy pollution insurance to cover lawsuits resulting from environmental accidents.

Product

Product liability insurance is not a compulsory class of insurance in all countries, but legislation such as the UK Consumer Protection Act 1987 and the EC Directive on Product Liability require those manufacturing or supplying goods to carry some form of product liability insurance, usually as part of a combined liability policy. The scale of potential liability is illustrated by cases such as those involving Mercedes-Benz for unstable vehicles and Perrier for benzene contamination, but the full list covers pharmaceuticals and medical devices, asbestos, tobacco, recreational equipment, mechanical and electrical products, chemicals and pesticides, agricultural products and equipment, food contamination, and all other major product classes.

Personal Accident Insurance

Personal accident insurance is a policy that can reimburse your medical costs, provide compensation in case of disability or death caused by accidents.

Accidental death If the policyholder dies in an accident then his nominee gets accidental death compensation. The family is financially secure in this situation. The compensation can vary from Rs 5 lakh to Rs 1 crore.

Permanent total disability in an accident At times, despite medical help the victim becomes disabled for life. Then the insurance policy pays a certain amount depending upon the nature of the disability. The policy also covers loss of speech, loss of vision in both eyes, and hearing loss in both ears.

Permanent partial disability This is applicable if a person has partially lost their hearing in one ear or suffered eyesight loss in one eye. Or, it could be that the policyholder has lost an index finger, a thumb, or even a hand. In all these cases, the policyholder can approach the insurer for a claim.

Transportation benefit Some insurers also grant a family transportation benefit. Say, the insured person is in a hospital outside 150 km of his home. The immediate family member will incur certain transportation expenses to reach the hospital. The insurance will reimburse these expenses up to a maximum of Rs 50,000.

Further benefits: The insurance covers other factors like education and employment benefits, and funeral expenses. You also get coverage for hospital charges, including ambulance costs. Some policies offer an educational allowance and home or vehicle alteration benefits.

Specialty Insurance

specialty insurance is insurance that can be obtained for items or events that are considered unique or special circumstances. The items that would fall in these categories are rarely covered by standard insurance policies. This could be anything from powersports vehicles to educational liability, and even specialty homeowners insurance for houses with aging roofs.

Specialty insurance plans are made specifically for businesses that need unusual coverage. These business accounts may involve high-risk holdings or could feature objects that are not usually covered under standard policies. As an example, guns and antiques are two items that require specialty insurance in order for the investment to be protected adequately.

Any type of business that serves clients who engage in high-risk behavior will have to research specialty insurance plans. For instance, a skydiving company may be considered very high risk and be subject to higher incidences of liability claims. Construction companies are another example of businesses that typically take out specialty insurance coverage. Builders are frequently sued, so specialty insurance is needed to negate the risk.

• Specialty insurance is intended to cover businesses with nontraditional needs. The construction, environmental, healthcare and energy industries are examples of specialty insurance industries.
• Quotes for specialty insurance depend on your industry and the risk your company faces of being sued. You can add an umbrella policy as a way to increase maximum payout amounts of your plan.

Insurance appraisers

Insurance appraisers will determine costs for repairs regarding items such as cars following an accident. They will liaise with a garage to ensure that cost estimates and recommendations are met and followed. This is an incredibly important task as it will affect the payout which claimants are offered.

Sales manager

Sales managers are responsible for growth of the insurance company. They will usually be given a region in which to operate and targets for growth which are expected to be met. As well as analysing sales statistics they will also be responsible for training their sales staff to ensure that company policies are met and that all the legal procedures are always followed. This means that mis-selling practices should be tackled head on and not encouraged, something which can be difficult when trying to meet sales targets without putting undue pressure on staff.

Insurance underwriter

An insurance underwriter’s role is to review the individual applications made for insurance policies and, based upon perceived risk, decide whether the policy shall be offered and at what cost. This is largely a customer focused area of the business but requires a thorough and comprehensive knowledge of the entire industry. Those looking at this job will need to learn fast and be aware of the ever changing nature of the insurance industry.

Insurance adjusters

Insurance adjusters have one of the most important insurance jobs in that they investigate liability and attempt to make the settlement with the claimant. This can involve a great deal of investigation and analysis and is therefore a job suitable for those with strong organisation skills and plenty of determination.

Customer service representative

A customer service representative deals directly with the customer and is responsible for the public perception of the firm. This may include being the initial first point of contact when a claim is made as well as recording any complaints or disputes that the customer might have against the firm or the treatment they received when making a claim or buying a policy.

Personal finance advisors

Personal finance advisors need to have a good working knowledge of the differing policies within the organisation as it is their job to explain these to customers and ensure that the insurance which is taken out is the most beneficial to the customer. This means avoiding poor selling practices which can lead to mis-selling. They should not be confused with independent financial advisors though who act as an impartial individual and do not represent a particular company.

Insurance clerks

Insurance clerks are responsible for the everyday filing and administration regarding policies. This will involve updating records and passing on any changes to the appropriate personnel. This is especially important as insurers will typically deal with a large volume of customers, making record keeping vital to their success. Without up to date and accurate information they would struggle to complete their tasks which would be detrimental to the firm as a whole.

Claims examiner

A claims examiner will look into any disputed cases and ensure that any claim is processed in accordance with the company’s policies. They will also report any discrepancies regarding over or under payment to help the insurer stay on top of every aspect of their business.

Auditor

The auditor will examine the insurance company’s records to establish how much money they currently have, how much has been paid in and how much is paid out. This is vital for the development and progression of any insurer and helps them to target their resources more effectively.

Actuary

An actuary’s role is to analyse certain risks and forecast potential payouts based upon these risks. All aspects of the insurance industry are based on risk and that means that those working in this role ultimately help shape the cost and cover of all policies.

Underwriting is the process of reviewing and selecting risks that an insurer might accept, under what terms, and assigning those an expected cost and level of riskiness.

• Some underwriting processes are driven by statistics. A few insurers who developed a highly statistical approach to underwriting personal auto coverages have experienced high degree of success. With a careful mining of the data from their own claims experience, these insurers have been able to carefully subdivide rating classes into many finer classes with reliable claims expectations at different levels.  This allows them to concentrate their business on the better risks in each of the larger classes of their competitors while the competitors end up with a concentration of below average drivers in each larger class.  This statistical underwriting process is becoming a required tool to survive in personal auto and is being copied in other insurance lines.
• Many underwriting processes are highly reliant on judgment of an experienced underwriter. Especially commercial business or other types of coverage where there is very little close commonality between one case and another.  Many insurers consider underwriting expertise to be their key corporate competency.

Usually the underwriting process concludes with a decision on whether to make an offer to accept a risk under certain terms and at a determined price

How underwriting can go wrong:

• Insurers are often asked to “give away the pen” and allow third parties to underwrite risks on their paper. Sometimes a very sad ending to this.
• Statistical underwriting can spin out of control due to antiselection if not overseen by experienced people. The bubble of US home mortgage securities can be seen as an extreme example of statistical underwriting gone bad.  Statistics from prior periods suggested that sub prime mortgages would default at a certain low rate.  Over time, the US mortgage market went from one with a high degree of underwriting of applicants by skilled and experienced reviewers to a process dictated by scores on credit reports and eventually the collection of data to perform underwriting stopped entirely with the no doc loans.  The theory was that the interest rate charged for the mortgages could be adjusted upwards to the point where extra interest collected could pay for the excess default claims from low credit borrowers.
• Volume incentives can work against the primary goals of underwriting.
• Insurance can be easily undone by underwriting decisions that are good risks, but much too large for the pool of other risks held by the insurer.

To get Underwriting right you need to:

• Have a clear idea of the risks that you are willing to accept, your risk preferences. And be clear that you are going to be saying NO to risks that are outside of those preferences.
• Not let the pen get entirely out of the hand of an experienced underwriter that is trustable to make decisions in the interest of the firm, either to a computer or to a third party.
• Oversight of underwriting decisions needs to be an expectation at all levels. The primary objective of this oversight should be to continually perfect the underwriting process and knowledge base.
• Underwriters need to be fully aware of the results of their prior decisions by regular communication with claims and reserving people.

Value

• Alignment of the pricing market strategy and reinsurance arrangements to the organisation’s risk appetite as well as optimising the goals of the organisation
• Assist clients to recognise risk events and changes to claim rates earlier, so as to move towards a more market responsive, risk-based pricing approach which ensures the efficient deployment of capital and a reduction in extreme risk event losses.
• Enhance the feedback mechanism from claims function to underwriting and product development processes to improve the performance and profitability of these processes.

Work Undertaken

• Assessment, design and implementation of Insurance Strategies
• Assessment, design, implementation of Insurance Risk Frameworks
• Assessment, design and implementation of insurance risk related risk portfolios and assessment methodologies
• Assessment, design and implementation of Insurance Risk Appetite Statements
• Claims Function KPI design
• Commodity Sector Strategy Input
• Insurance Product Pricing
• Underwriting Function KPI design
• Reinsurance Program Design

Work Undertaken

• Insurance Risk Analysis: Trend analysis
• Insurance Risk Analysis: Exposure Measurement
• Insurance Risk Exposure Management
• Risk capital Reserving
• Claims Result Analysis
• Reinsurance Effectiveness
• Insurance Risk Aggregation and concentration risk measurement and management
• Peer review Actuarial Services
• Audit review of liabilities, capital etc
• Insurance Needs Assessment and/or Insurance Selection recommendations for non-insurance clients
• Risk Management Software Systems: Insurance Risk Underwriting Software Design, Specifications, Testing, Review
• Mergers and Acquisitions assistance

Underwriting risk is the risk of loss borne by an underwriter. In insurance, underwriting risk may arise from an inaccurate assessment of the risks associated with writing an insurance policy or from uncontrollable factors. As a result, the insurer’s costs may significantly exceed earned premiums.

An insurance contract represents a guarantee by an insurer that it will pay for damages and losses caused by covered perils. Creating insurance policies, or underwriting typically represents the insurer’s primary source of revenue. By underwriting new insurance policies, the insurer collects premiums and invest the proceeds to generate profit.

An insurer’s profitability depends on how well it understands the risks it insures against and how well it can reduce the costs associated with managing claims. The amount an insurer charges for providing coverage is a critical aspect of the underwriting process. The premium must be sufficient to cover expected claims but must also take into account the possibility that the insurer will have to access its capital reserve, a separate interest-bearing account used to fund long-term and large-scale projects.

In the securities industry, underwriting risk usually arises if an underwriter overestimates demand for an underwritten issue or if market conditions change suddenly. In such cases, the underwriter may be required to hold part of the issue in its inventory or sell at a loss.

Determining premiums is complicated because each policyholder has a unique risk profile. Insurers will evaluate historical loss for perils, examine the risk profile of the potential policyholder, and estimate the likelihood of the policyholder to experience risk and to what level. Based on this profile, the insurer will establish a monthly premium.

If the insurer underestimates the risks associated with extending coverage, it could pay out more than it receives in premiums. Since an insurance policy is a contract, the insurer cannot claim they will not pay a claim on the basis that they miscalculated the premium.

The amount of premium that insurers charge is partially determined by how competitive a specific market is. In a competitive market composed of several insurers, each company has a reduced ability to charge higher rates because of the threat of competitors charging lower rates to secure a larger market share.

State insurance regulators attempt to limit the potential for catastrophic losses by requiring insurers to maintain sufficient capital. Regulations prevent insurers from investing premiums, which represent the insurer’s liability to policyholders, in risky or illiquid asset classes. These regulations exist because one or more insurers becoming insolvent due to an inability to pay claims, especially claims resulting from a catastrophe, such as a hurricane or a flood, can negatively impact local economies.

Underwriting risk is an integral part of the business for insurers and investment banks. While it is impossible to eliminate it entirely, underwriting risk is a fundamental focus for risk mitigation efforts. The long-term profitability of an underwriter is directly proportional to its mitigation of underwriting risk.

Risk, exclusivity, and reward

Once the underwriting agreement is struck, the underwriter bears the risk of being unable to sell the underlying securities, and the cost of holding them on its books until such time in the future that they may be favorably sold.

If the instrument is desirable, the underwriter and the securities issuer may choose to enter into an exclusivity agreement. In exchange for a higher price paid upfront to the issuer, or other favorable terms, the issuer may agree to make the underwriter the exclusive agent for the initial sale of the securities instrument. That is, even though third-party buyers might approach the issuer directly to buy, the issuer agrees to sell exclusively through the underwriter.

In summary, the securities issuer gets cash up front, access to the contacts and sales channels of the underwriter, and is insulated from the market risk of being unable to sell the securities at a good price. The underwriter gets a profit from the markup, plus the possibility of an exclusive sales agreement.

Also, if the securities are priced significantly below market price (as is often the custom), the underwriter also curries favor with powerful end customers by granting them an immediate profit (see flipping), perhaps in a quid pro quo. This practice, which is typically justified as the reward for the underwriter for taking on the market risk, is occasionally criticized as unethical, such as the allegations that Frank Quattrone acted improperly in doling out hot IPO stock during the dot-com bubble.

In an attempt to capture more of the value of their securities for themselves, issuing companies are increasingly turning to alternative vehicles for going public, such as direct listings and SPACs.

Continuous underwriting

Continuous Underwriting is the process in which the risks involved in insuring people or assets are being evaluated and analyzed on a continuous basis. It evolved from the traditional underwriting, in which the risks only get assessed before the policy is signed or renewed. Continuous underwriting was first used in Workers’ Compensation, where the premium of the insurance was updated monthly, based on the insured’s submitted payroll. It is also used in Life Insurance, as well as Cyber Insurance.

Real estate underwriting

In evaluation of a real estate loan, in addition to assessing the borrower, the property itself is scrutinized. Underwriters use the debt service coverage ratio to figure out whether the property is capable of redeeming its own value.

Forensic underwriting

Forensic underwriting is the “after-the-fact” process used by lenders to determine what went wrong with a mortgage. Forensic underwriting is a borrower’s ability to work out a modification scenario with their current lien holder, not to qualify them for a new loan or a refinance. This is typically done by an underwriter staffed with a team of people who are experienced in every aspect of the real estate field.

Sponsorship underwriting

Underwriting may also refer to financial sponsorship of a venture, and is also used as a term within public broadcasting (both public television and radio) to describe funding given by a company or organization for the operations of the service, in exchange for a mention of their product or service within the station’s programming.

The job position includes:

• Reviewing specific information to determine what the actual risk is
• Determining what kind of policy coverage or what perils the insurance company agrees to insure and under what conditions
• Possibly restricting or altering coverage by endorsement
• Looking for proactive solutions that might reduce or eliminate the risk of future insurance claims
• Possibly negotiating with your agent or broker to find ways to insure you when the issue isn’t so clear-cut or there are insurance issues.

Biometric Risks

Biometric risks refer to the risk that the company has to pay more mortality, disability or morbidity benefits than expected, or the company has to keep paying pension payments to the pension policy holders for a longer time (longevity risk) than expected when pricing the policies.

Policyholder Behavior and Expense Risks

Policyholder behaviour risks arise from the uncertainty related to behaviour of the policyholders. The policyholders have the right to cease paying premiums (lapse risk) and may have a possibility to interrupt their policies (surrender risk).

Behaviour of Policyholders is a major risk as well and ability to keep lapse and surrender rates in a low level is a crucial success factor especially for the expense result of unit-linked business.

Discount Rate Risk in Technical Provisions

Discount rate risk in technical provisions is the main risk affecting the adequacy of technical provisions. The guaranteed interest rate in policies is fixed for the whole policy period. Thus, if market interest rates and expected investment returns fall, technical provisions may have to be supplemented.

Methods

Avoidance

Avoidance is a method for mitigating risk by not participating in activities that may incur injury, sickness, or death. Smoking cigarettes is an example of one such activity because avoiding it may lessen both health and financial risks.

Life insurance companies mitigate this risk on their end by raising premiums for smokers versus nonsmokers. Health insurers are able to increase premiums based on age, geography, family size, and smoking status. The law allows for up to a 50% surcharge on premiums for smokers.

Loss Prevention and Reduction

This method of risk management attempts to minimize the loss, rather than completely eliminate it. While accepting the risk, it stays focused on keeping the loss contained and preventing it from spreading. An example of this in health insurance is preventative care.

Health insurers encourage preventative care visits, often free of co-pays, where members can receive annual checkups and physical examinations. Insurers understand that spotting potential health issues early on and administering preventative care can help minimize medical costs in the long run. Many health plans also provide discounts to gyms and health clubs as another means of prevention and reduction in order to keep members active and healthy.

Transferring

The use of health insurance is an example of transferring risk because the financial risks associated with health care are transferred from the individual to the insurer. Insurance companies assume the financial risk in exchange for a fee known as a premium and a documented contract between the insurer and individual. The contract states all the stipulations and conditions that must be met and maintained for the insurer to take on the financial responsibility of covering the risk.

Sharing

Sharing risk is often implemented through employer-based benefits that allow the company to pay a portion of insurance premiums with the employee. In essence, this shares the risk with the company and all employees participating in the insurance benefits. The understanding is that with more participants sharing the risks, the costs of premiums should shrink proportionately. Individuals may find it in their best interest to participate in sharing the risk by choosing employer health care and life insurance plans when possible.

Retention

Retention is the acknowledgment and acceptance of a risk as a given. Usually, this accepted risk is a cost to help offset larger risks down the road, such as opting to select a lower premium health insurance plan that carries a higher deductible rate. The initial risk is the cost of having to pay more out-of-pocket medical expenses if health issues arise. If the issue becomes more serious or life-threatening, then the health insurance benefits are available to cover most of the costs beyond the deductible. If the individual has no serious health issues warranting any additional medical expenses for the year, then they avoid the out-of-pocket payments, mitigating the larger risk altogether.