PDI ~ Insurance Underwriting and Claims
Anything that tends to increase the probable frequency and severity of losses caused by an insured peril. For example, a commercial building is subject to the peril of fire. The practice of storing oily rags in cardboard boxes inside that building is a hazard; this practice tends to increase the probable frequency and severity of losses caused by the peril of fire. Hazards can be divided into four classes : (1) physical, (2) moral, (3) morale and (4) legal.
Hazard :
(i) Reinsurer participates in the underwriting of each policy, large and small, and pays in the same proportion his share of the losses without statistic exists (ii) Simplify administrative work and reduce costs in branches with an important volume and relatively uniform sums insured (iii) In need of financial assistance, in order to cover a large increase in production (iv) A relief for a limit period of time if loss ratio is too bad and cannot correct immediately, otherwise will harm the relationship with sale organization and clientele (客戶). (v) Prevent abrupt variations (突然變化) in loss ratio from one year to the next with moderate sums insured Example - 60% quota share treaty : 40% retained by Insurer; 60% less 30% RI commission ceded to Reinsurer. L/L : HKD400,000 Premium : HKD2,000 Insurer Premium : HKD800 (HKD2,000 x 40%) Reinsurer Premium : HKD1,200 (HKD2,000 x 60%) RI commission : HKD360 (HKD1,200 x 30%) Loss : HKD400,000 Cedant pays HKD160,000 (HKD400,000 x 40%); Reinsurer pays HKD240,000 (HKD400,000 x 60%)
Proportional treaties : (1) Quota share - cedant binds himself to retain and cede fixed proportions of all the business he writes up to a fixed amount when :
(i) Fire : on the basis of estimated maximum loss (EML), the lines correspond to an estimated loss per risk, subject to large deviations. (ii) Do in-depth analysis of its business to find the most appropriate structure. Create units or groups of sum ceded, which offer an optimum relationship between premiums and liabilities. These groups should make up different, more or less balanced treaties, with a premium income corresponding more or less to the liability of the treaty. The more balanced the treaty, the smaller the fluctuations in the loss ratios and, as a result, the better the reinsurance conditions. Example - 9-lines surplus treaty, each line HKD50,000 = HKD450,000 (9 x HKD50,000) Minimum retention HKD50,000; total capacity to Insurer HKD500,000 (HKD450,000 + HKD50,000) Loss : ≤ HKD50,000 retained by Insurer; ≥ HKD50,000 till HKD450,000 ceded to Reinsurer.
Proportional treaties : (2) Surplus - Company only cedes those amounts which it cannot or does not want to retain for own account. The cover is expressed as a multiple of lines, where one line is usually equal to the cedant's retention, with a maximum amount that can be ceded to the Reinsurer.
(1) Avoiding adverse selection - Adverse selection occurs when the applicants for insurance are largely those most likely to suffer a loss. Because of adverse selection, an insurance Company must "select or be selected against". If the insurance Company does not practice selection competently, the insured will adversely select against the Company. - To protect the insurance Company against the consequences of adverse selections and to ensure the continued economy viability of the Insurer. (2) Generating profits - Generate an increase in surplus and maximize profits. The continued survival of efficient firms is vital for the continued well-being of society. (3) Insurance contribution to social welfare - Offers mortgage on affordable terms. - Amassing inventories of goods. - Overseas shipments and normal commercial transactions. - Collect premium from the insured and utilize a portion for capital investments. - Reduce the cost of capital lowers the cost of goods and services businesses provide to the community.
Purpose of underwriting :
(i) Claims forms to provide initial notice of the loss and to record details of what happened, which allow you to determine nature of loss or liability and to allow claim to be processed. (ii) Documents required - supporting documents to verify the loss. a) Repair quotations b) Invoices / receipts verifying original purchases c) Operation manuals d) Photographs e) Valuations f) Statements by witness g) Letters of demand (iii) Entering data - complete all the pre-determined fields of information on screen, in particular the reserve. Data must be accurate as it will determine the future pricing of particular product and determine how you and your co-workers respond to enquiries regarding the claims and its progress. (iv) Recognizing non-routine claims - some require specialist treatment and fall into specific category. It should be referred to senior staff who advise, guide junior staff and maintain a watching brief. a) Clients have insurance more than 1 class b) Unusual large losses c) Claims where fraud is suspected d) Late reported claims e) Remoteness of the loss f) Special assistance from professionals, e. g. loss assessors, adjusters, etc. (v) Interpreting and analyzing the claim - compare the information provided on the claim form with the information held on the policy file in order to verify certain fundamental relationships which are crucial to the payment of the claim. a) Person making the claim is the insured or on behalf of the insured b) Address where loss occurred corresponds with the address shown on policy c) Property claimed is covered by policy wording d) Cause of loss giving rise to claim is an insured peril or a defined event under policy and not an exclusion e) Policy was current at the time of loss f) Information on the claim form is consistent with the statements made in the proposal upon which policy was accepted g) Whether an act or omission of the insured caused or contributed to the loss h) Whether the claim is fraudulent (vi) Fraudulent claims a) Claiming for non-existent property b) Claiming for property which was not stolen c) Claiming inflated amounts which bear no relationship to actual value d) Forging (鍛造) documents, e. g. receipts, valuations, etc.. e) Forging signatures f) Claiming an amount which include profit g) Blaming loss or damage caused by the insured on others, i.e. burglars (竊賊), vandals (破壞者), etc.. (vii) Dealing with fraud A crime to attempt to profit from the subject-matter insured by claiming insurance, but hard to prove. a) Onus of proof - "proof beyond reasonable doubt" (i) An insured event has occurred under a contract indemnifying the client (ii) A loss has occurred (iii) The client had a pecuniary interest in the damaged property b) Establishing the cause - assessor's report should be conclusive, but court takes a careful view where a person's right are threatened. c) Routine checks (i) Proximate cause (ii) Premium paid (iii) Pecuniary interest at the time of loss (iv) Proposal was answered correctly (v) No criminal record (vi) No non-disclosure by the insured at recent renewal
Receiving claims
(1) Selecting the risk - most important underwriting task. You must gather information. Remember that your underlying objective is to contribute to a profitable portfolio. You must have full knowledge of the hazards presented before you can accept the risk and assign terms and conditions. Significant tools of selecting the risk - (i) Company's risk acceptance guidelines or Company underwriting and rating guidelines, detailing acceptable characteristics that a risk must meet, rates and terms and conditions that apply. (ii) More experienced underwriting colleagues. (iii) Knowledge of occupations and trades. (iv) Knowledge of modern industrial and technological developments, e.g. sub-standard and superior risks (v) Surveyor's risk inspection reports (vi) Common sense and experience Company guidelines also includes - (i) A referral list - identifying risks that the Company will not usually accept, but may on certain conditions, must be referred to a higher authority and rates will reflect the sub-standard nature of risk. (ii) A decline risk - risks that the Company will not accept, not necessarily "bad" risks; just outside the Company's expertise or excluded on other grounds. (2) Determining policy terms and conditions - accepting a risk is linked to the terms and conditions, need to decide whether standard policy form is acceptable for a particular risk or whether need to vary it, e. g. excess, exclusions and warranties. (3) Determining the classification and rate - premium rates and the processes used to calculate them will be set down in your Company's rating manuals. Most premium rates are pre-determined, e. g. household and motor, but you still need to understand the concept of rating and the elements for rating a policy. (i) Setting premium rates - highly complex and specialized area of operations. A senior underwriter, with the help of actuaries, will calculate a risk premium according to the claims experience and hazards presented by each risk or class of risk. (ii) Pure risk premium - reflect the risk hazards exposure and to meet claims. (iii) Premium rate - cost of claims + cost of administrating the policy or portfolio, including sales expenses, commissions + margin for reserves, contingencies and profit. (iv) Statistic are used to make reasonable estimate of expected claims, which involves review of past claims experiences for a particular class over a number of years combined with an evaluation of future trends. (not predicted very accurately) (4) Entering the data - the accuracy of the per risk data input and the credibility of the per risk computer data is critical to the statistical analysis, so it is very important that you take the utmost care to check that data is accurate, complete and current. (5) Deciding how much risk is to retained by the Company and the amount of reinsurance necessary - reinsurance is spreading the risk between the Insurer and Reinsurer. (i) How much of the risk it will retain itself (Insurer) (ii) How much of the risk it will transfer via insurance (Reinsurer) Insurance companies who accept business directly from the public are able to accept business from other Insurers. On the other hand, Reinsurers do not accept business from the public, only from other Insurers.
5 main functions of an underwriter :
(1) Cedant can increase his underwriting limit without upsetting his automatic treaties and often finds a market for risks which seems to him to be undesirable or of an aleatory (偶然) nature. (2) Reinsurer can do individual examination of risk, with the option to accept or refuse, and as a result the chance of selecting a portfolio which corresponds exactly to his underwriting policy (3) Reinsurer has possibility of exercising a certain amount of influence on the cedant's underwriting by asking him to improve the risks offered or advising him of covers which have shown losses elsewhere (4) Reinsurer has possibility of obtaining an adequate premium rate, either by requesting an increase in the rate offered, by reducing the reinsurance commission, or by indicating a risk premium (5) Reinsurer has a more advantageous position for accurately determining the commitment per risk and accumulation
Advantages of Facultative Reinsurance :
(1) Appointing the assessor - investigate the circumstances surrounding the claim, which enable you to determine whether a loss is admissible and how much to pay after you have considered the terms, and conditions of policy. (i) Brief to the assessor : a) A copy of claim form b) All policy records c) Other relevant documentation and information d) Specific instructions, e.g. standing instructions on response times, regularity of reports and settlement guidelines (ii) Assessor's report : preliminary report includes all relevant information you need to create appropriate reserve and make your decision whether to pay the claim or order further investigations. Final report should recommend settlement figure and explain and support loss assessment. (2) Analyzing the report - accept without question. Verify assessor's recommendations with the settlement terms and conditions of the policy and within Company guidelines. Code of conduct or professional or industry codes to compile. (3) Opening the claims file - and enter on computer system, which allocate claim number. Information include date of claim received, policy number, insured's name and address, time and date of loss, location of loss, type and description of claim, 3rd party's name and address, estimate of claim and name of loss assessor appointed. (4) Maintaining accurate records - database is useful to analysis claims and trends, pricing decisions and determination. Amend opening claims reserve in line with developments as the claim progresses. Claims reserves should be reviewed and adjusted at least every 3 months. Over reserve leads to misleading; under reserve weaken the account. Running status include times, dates, phone calls made and decisions taken, etc. (5) Recoveries (6) Settling claims (7) Finalizing the claims (8) Participating in negotiations (9) Planning (10) Collecting, analyzing and organizing (11) Conducting the negotiation (12) Confirming outcomes and documentation
CLAIMS HANDLING
(1) Dynamic and static risks - Dynamic risks (動態風險) : financial losses caused by changes in the economy, for example, price levels, consumer tastes and technology which is not insurable. - Static risks (靜態風險) : financial losses caused by no change in the economy, for example, fire, accidents or dishonesty which is insurable. (2) Fundamental and particular risks - Fundamental risks (基本風險) : impersonal and involve large sections of community, for example, unemployment, war, earthquakes, inflation and flood damage which usually dealt with government. - Particular risks (特殊風險) : personal and consequence, for example, break-in, fire, or robbery which is insurable. (3) Pure and speculative risks - Pure risk (純風險) : either loss or no loss. There is no gain, only loss or absence of loss, for example, home insurance being used to protect homeowners against their homes being destroyed which is insurable. - Speculative risk (投機風險) : not only a possibility of loss but also of gain, for example, start a business and gambling which is not insurable.
Categories of risk :
Procedures in place to enable you to process claims efficiently.
Claims process :
(1) Main objectives are : (i) Receive referrals for complaints and facilitate settlement or withdrawal by making of awards or by expedient (手法). (ii) Consult, instruct or obtain advice from counsellors, professional advisers, experts, adjudicators (審判員) and arbitrators(仲裁員), etc. (iii) Establish and maintain rules with guarantee of integrity (誠信), competence (權限) and high standards of service. (2) Insurance claims complaints panel : provide independent and impartial adjudication of complaints between Insurers and policyholders or their beneficiaries and rightful claimants. Complaints panel is an independent body, led by independent chairman who appointed by Secretary for Financial Services and Treasury. 4 members, 2 within insurance industry and 2 from outside. Jurisdiction limit is HKD1,000,000. If complainants find Complaints Panel's decision unacceptable, they are free to seek legal redress (平反), because their legal rights are not affected by reference to Complaints Panel. (3) How to lodge a complaint : made in writing with full details of the subject of complaint, Insurer's name, policy number, claim amount and completed Authorization Form together with copies of the following documents : (i) Full set of policy document together with application form (ii) Claim form (iii) Medial report / surveyor report / quotation for repair or repair receipt / police statement (iv) Written notification by Insurer with final decision to claim dispute (4) Terms of reference (i) Complaint is claim-related (ii) Claim amount not exceeding HKD1,000,000 (iii) Insurer is Bureau Member (iv) Policy is Personal Insurance Policy (v) Complaint is filed by policyholder / beneficiary / rightful claimant (vi) Insurer made final decision on the claim (vii) Complaint is filed with the Bureau WITHIN SIX MONTHS from notification day by the Insurer of its final decision. (viii) Dispute in question does not arise from industrial, commercial or 3rd party insurance (ix) Claim is not subject to legal proceedings or arbitration.
Complaint mechanisms The Insurance Claims Complaints Bureau - self-regulatory and handle insurance claims complaints of all personal insurance policies with free of charge to complainants.
(1) Force the cedant to limit to a minimum the number of eisks he cedes facultatively (2) Delay in issuing a policy can create problems with both agents and clients (3) Administration costs are higher (4) Insurer can possibly loss some of his freedom when fixing the terms of the insurance and settling losses (5) If the business is placed by facultative reinsurance with a competitor certain tensions can arise (6) In cases where he has difficulty placing a risk, cedant cannot cover his costs
Disadvantages of Facultative Reinsurance :
(i) Professions, occupations, types of risk, rates, terms and conditions (ii) Insurance proposals from professions, trades, types of risks and classes that the Company would not normally accept, might consider for acceptance under some circumstances by authorized staff. (iii) Insurance proposals must be declined because they fall outside Company guidelines.
EVALUATION AND SELECTING RISKS (1) Company underwriting acceptance criteria : set down strict risk acceptance criteria and framework within you make decisions on risk acceptability.
(i) Physical hazards (物理風險) - conditions of premises and the activities that go on there, such as construction (poor repair), occupation (flammable liquids), location (high risk of burglary) and protection system (unguarded machinery / poor fire protection) which are collected by underwriter. Underwriter must consider the following factors in relation to the perils the insured is being covered against : a) Insured's activities - legal / public liability b) Insured's premises - location and conditions c) Precaution taken by the Insured - minimize possible loss d) Size of business - the larger the business the higher the people exposure (ii) Moral hazards (道德風險) - character, qualities and reputation of Insured, general nature of his / her employees and associates, subject-matter (vulnerability to changes in fashion, technology), care and efficiency of management (past history of embezzlement (舞弊) or obsolete (過時) stock) which are collected by underwriter. Poor moral hazards increase the uncertainty in the risk and no premium loading or special terms will make it acceptable, impossible to underwrite. Moral hazards are the most difficult to detect and can cause problems. Indicators can include : a) Questionable past losses b) Fraudulent and exaggerated claims c) Questionable business practices d) Poor financial history or obvious cash flow problems (iii) Morale hazards (風紀風險) - caused by indifference (漠不關心) or carelessness (疏忽), not by proposer's poor character (性格) or integrity (誠信). Morale hazard indicate Insured's attitudes and often follow inadequate financial capital. Poor morale hazard increases the uncertainty factor because Insured may act in a way which leads to losses through carelessness or poor management practice : a) A factory where management fails to keep the floor free of off-cuts (切裁紙) and other waste b) A retail store that does not have enough employee to keep stock on others c) Poor regard to employee safety in a factory which may result in conditions that increase the risk of employee injury &/or fire hazard d) Poor building and plant maintenance, e.g. frayed wiring, leaking roofs, etc. e) Poor security where the insured's property is not adequately protected from loss or damage (iv) Legal hazards (法律風險) - relate to the operate of laws. Keep up to date with legislation and aware of court decisions that affect your work. Courts can bring down findings of negligence in situations where such a possibility had not been contemplated by underwriters. Poor legal hazard increases the risk of : a) Liability - commercial property insurance includes liability b) Property insurance - building codes and regulations, local by-laws and regulations and changing fire prevention requirements all affect the risk exposure
EVALUATION AND SELECTING RISKS (2) Type of hazards : condition which increases the chance of loss, firstly to the customer and ultimately to the Insurer.
(1) Reasons for ex-gratia : (i) Good public relations (ii) Commercial considerations (iii) Avoiding legal actions (2) Reasons against ex-gratia : (i) Create an "easy" image to claimants (ii) Create a precedent (iii) Undermine basic underwriting (iv) Insurers are not charitable institutions
Ex-gratia consideration - out of favour / from grace, i.e. payment when there is no legal liability.
(i) Above standard risks - every Insurers seek to enhance its portfolio with high protective measures, e.g. modern high-rise office block, fully computerized factory / warehouse, premises with burglary alarm with central control connection, etc., attracts low premiums &/or improved terms. Because good risk reduces probability of claims below that of standard covers. But, should base your decision on facts provided by survey reports and engineers' or architects' recommendations, rather than just on what appears to be "good risk". (ii) Below standard risks - less attractive business may be part of an overall account or risk for consideration of a good quality. Accommodation business is when an Insurer may feel obliged to quote terms for business that would not normally come within its acceptance criteria. If you accept below standard 'accommodation' business from intermediates, it is important to keep score, in writing; help balance the portfolio is to ensure that additional good risk is written in exchange for the accommodation risk that has been accepted. (iii) Less acceptable risks can be handled by : a) Increased premium b) Deductibles / excesses c) Restricted cover d) Risk improvements e) Reinsurance program (iv) Improving poor risks is one solution, but addressing them directly (optimizing risk) may be another. Taking more active role than risk minimization and tackling the root causes of risk head on. a) Appointment of safety officer b) Appropriate fire drills c) Possibly a private fire brigade in large complexes d) Installation of fire-protection equipment, e. g. sprinklers, hydrants, hoses and fire-extinguishers e) Loss reporting and studying the incidents that arise f) Management commitment to loss prevention
EVALUATION AND SELECTING RISKS (3) Types of risks : prefer to accept only good quality business, but inevitably proposals will vary from above standard to below standard risks.
(i) Situation and its claims experience (ii) Proposer's claims experience / previous declinature (iii) Occupation and its claims experience (iv) Physical hazards (v) Moral hazards (vi) Morale hazards
EVALUATION AND SELECTING RISKS (4) Independent surveys and inspections by surveyors
(i) 1st duty is to thoroughly examine the risk by survey : a) Inspecting physical hazards with a view to noting all of the features that either reduce or increase the risk b) Assessing moral and morale hazards c) Assessing likelihood of loss and maximum probable loss that could occur d) Assessing adequacy of sum insured or limit of liability compared with value at risk (ii) 2nd duty is to describe the risk in a written report covering all hazards from the risk arises : a) Describe nature of business activity in which proposer is engaged, or products being manufacture, condition of premises and standard of housekeeping b) Make detailed written comments on every aspect of examination of the risk, stressing both favourable and unfavourable points c) Plan of situation of the risk must be prepared d) Report and plan may be supplemented by photographs of the risk (iii) Final duty is suggest or recommend methods of improving or reducing likelihood, frequency and amount of loss, which should be incorporated into the survey report.
EVALUATION AND SELECTING RISKS (5) Duties of Specialist Surveyor (e. g. pre-loss surveyors)
(i) Public prevention - building codes, enactment or rules regarding storage of hazardous goods (ii) Private prevention - housekeeping, fire wheel, sprinkler system, alarm system
EVALUATION AND SELECTING RISKS (6) Loss prevention
Loss : 1,000 of 3,000 on policies Total Loss : HKD3,000,000 XOL : HKD2,000,000 xs HKD500,000 Cedant pays HKD1,000,000 (HKD500,000 Cedant's retention + HKD500,000 non-insured part); Reinsurer pays HKD2,000,000
Example - Cover per event : offer Insurer protection aginst the accumulations resulting from numerous losses caused by the same event, e. g. storm, earthquake, aircrash, tsunami, etc., which protects the retention against catastrophes.
XOL : HKD2,000,000 xs HKD2,000,000 Loss : HKD3,000,000 Cedant pays HKD2,000,000; Reinsurer pays HKD1,000,000
Example - Cover per risk : relieve Insurer of losses which surpass that amount he has decided to retain for his own account on any determined risk.
XOL : 50% xs 100% Year 1 : HKD55M total annual loss; direct Insurer pays HKD50M; Reinsurer pays HKD5M. Year 2 : HKD45M total annual loss; direct Insurer pays HKD45M; Reinsurer pays HKD0M. Year 3 : HKD90M total annual loss; direct Insurer pays HKD65M (HKD50M retention + HKD15M non-insured part); Reinsurer pays HKD25M.
Example - Stop loss cover : direct Insurer's annual premium HKD50M , direct insurer's cost HKD15M (=30%)
XOL : 50% xs 90% Loss experience : 102% Cedant bears 90%; Reinsurer bears 12%
Example - Stop loss cover : protect annual result against negative deviation due to marked increase in the number and cost of the losses.
(i) Age (ii) Sex (iii) Health and health history (iv) Occupation and occupation history (v) Financial condition (vi) Personal habits : smoking or drinking alcohol (vii) Size of policy (viii) Current insurance in force
Factors in Underwriting : (1) Life, health and disability insurance -
(i) Type (ii) Value (iii) Condition (iv) Construction materials used (v) Potential hazards surrounding or within (vi) Age (vii) Usage (viii) Security measures and other loss control measures (ix) Upkeep (x) Location (xi) Current insurance in force (xii) Prior losses
Factors in Underwriting : (2) Property insurance -
(i) Type (ii) Size (iii) Financial condition of business (iv) Financial condition of owners (v) Business cycles (vi) Liability exposures (vii) Experience of key employees and owners (viii) Past losses experience
Factors in Underwriting : (3) Liability insurance
(1) Automatic covers have been used up (2) Risk is excluded from the obligatory treaty (3) Insurer does not want his reinsurance contracts "overburdened" with particularly heavy risks (4) Insurer has no automatic cover at his disposal in a particular branch where he only rarely issues policies Insurer has to offer the risk to the Reinsurer with enough information for the latter to be in a position to form an opinion on its quality. The more information, the faster the Reinsurer's decision. The Insurer must realize that he cannot issue a policy before having received the Reinsurer's formal acceptance. Each risk is an individual reinsurance contract. Usually 1 year contract and need to inform Reinsurer ahead upon renewal.
Facultative Reinsurance applies when :
(1) How convenient for the insured is the claim? If the answer is "very", that may be an indicator. (2) Replacement value provisions where new for old is not provided routinely (3) Evidence of financial strain (4) Over-insurance (5) New policy less than 12 months
Fraud indicators - detecting the probability of fraud, e.g. removal of family album from the house before fire accident.
(1) Hard market - rates rise, coverage is more difficult to find and Insurers' profit increase. E.g. Professional / Product Liability (2) Soft market - rates is stable or falling, high limits or new coverage is readily available and Insurers' profit decrease. E.g. Fire Insurance, Property (All Risks) Insurance, Marine Insurance. (3) Tight market - little or no insurance capacity caused by heavy losses and extreme price. It occurs toward the end of calendar year when underwriters have used their allocated surplus.
Insurance business cycle that where rates and premiums alternatively rise and fall, rather than growing smoothly. Causes are interest rate and stock market fluctuations, flow of excessive new capital into insurance industry during profitable years, social and economic inflation, catastrophic losses, and competition.
(1) Negotiation (協商) - involves 2 or more parties in order to resolve the dispute, whereby both or all attempt to achieve a resolution. Policy holder may contact Insurer to deal with the claim directly without intervention of 3rd party. (2) Arbitration (仲裁) - arbitrator acts as an independent and neutral 3rd party renders a final and binding decision after hearing arguments and reviewing evidence. Most of the insurance contracts have Arbitration Clause to resolve the dispute between policy holder and Insurer. (3) Mediation (中介) - a process that participants voluntarily, with support of a trained mediator, identify and clarify issue in dispute, create and develop options, negotiate those options and reach a full, partial or no agreement. Mediator acts as 3rd neutral and independent party to assist policy holder and insurer to reach their agreement. (4) The Insurance Claims Complaints Bureau
Insurance dispute resolution mechanism
A mathematical law that states : when the number of similar independent exposure units is increased, the relative accuracy of predictions about future outcomes is also increased. This law provides the theoretical foundation for the spread of such exposure units, which is a basis of insurance. Two requirements of insurable risk : (1) There must be a large number of independent, homogeneous units. (有足夠人數) (2) The loss insured against must be unlikely to involve a substantial portion of the exposures units simultaneously (non-catastrophic). (不能是會影響很多人的事件)
Law of large numbers :
(1) Size of cession is not determined case by case, thus allowing cedant to do away with cession bordereaux and reinsurance registers; only loss bordereaux are prepared. (2) Accounting operations are reduced to a minimum, but more elaborate (縝密). (3) Administration costs are reduced (4) Reinsurance premium is all inclusive and calculated on the whole of cedant's portfolio in one or more branches, in order to cover losses occurring during a calendar year. (5) Reinsurance premium is predetermined, which enables cedant to allow for the cost in his budget. (6) Cost of reinsurance can vary from one accounting period to the next depending on the development of the premium income, of the loss ratio, as well as of the reinsurance market. (7) Usually, no profit commission. (8) Reinsurer does not deposit technical reserves, so that cedant has to finance them himself.
Non-proportional treaties : A distribution of liability between the cedant and the Reinsurer on the basis of losses rather than sums insured. Reinsurer receives part of the original premiums which is not related to the sum insured.
A cause of loss. In a named-peril insurance contract, the perils for which coverage is provided are listed in the contract. When the contract is written on an "all risks" basis, means "all perils", coverage is provided on fortuitous losses caused by any peril other than those specifically excluded by the contract. E.g. Fire Insurance, All Risks Insurance.
Perils :
(1) The subject-matter insured (2) The variability in future losses, not the chance of loss. The greater the variability in the future outcomes, the less certainty one has about what the outcomes will be, and the riskier the situation becomes.
Risk :
(1) The loss must be fortuitous (unforeseen) - a loss which is expected to happen, or is intentionally brought about, is not suitable for insurance. (2) The loss must not be excessive - where large number of people are subject to heavy risk at the same time, government often accept responsibility for this risk. (3) The loss must not against the public interest - cannot against fine or penalties imposed by law. (4) There must be adequate numbers - large numbers of units for the law of average to operate which enable you to calculate the premium necessary to cover the losses and expenses of administering a fund. (5) The chance of loss must be assessable - able to calculate the chance of loss occurring. (6) A pecuniary (financial) loss should be possible - at the time of loss the insured suffers a financial loss which is covered by the insurance policy.
Risks that can be insured :
(1) Against the public interest - a person cannot insure a property that is used for an illegal purpose, or insure herself against fines for motoring offences, or insure against her own malpractice or fraud. (2) Maintenance risks - property policies will not usually insure against wear and tear, damage caused by moths or vermin, light or air, or processes of renovation, cleaning and so on. (3) Beyond the capacity of insurance companies - 2 common exclusions : war and radioactive contamination. Insurers do not have the capacity to bear the huge costs of massive and wide-spread destruction caused by war, nuclear weapons or nuclear fallout.
Some risks are not insurable :
(1) Risk sharing or risk bearing (2) Small premiums are collected into large fund from many insured to pay claims for those few who incur them. (3) To calculate premiums, Insurers need to know how much they are likely to pay out in claims. If the incidence of loss cannot be calculated statistically, it is difficult to determine a premium.
Transferring risks through insurance :
Cedant is bound to cede a fixed amount of his business in one branch, which the Reinsurer is obliged (強制) to accept. If the participation of the cedant and the Reinsurer in a contract is calculated as a fraction (分數) of the sum insured, is a proportional reinsurance. If distribution of the business is dependent on the loss, one has non-proportional reinsurance or excess of loss.
Treaty reinsurance :
(i) Class rates apply to a wide group of homogenous loss exposures, mainly for Account Underwriting, either without change or possibly subject to a merit rating plan, e.g. fire and allied perils rates, motor vehicles insurance rates. Each rating class must be defined clearly by certain characteristics that affect the probable frequency and size of loss which should be easy to identify and difficult for the insured to conceal and manipulate, e.g. dwellings (居所) is under fire insurance. (ii) Manual rate is simply a rate listed in a manual or rate book. Manual rates are always class rates. (iii) Advantages : simplicity of application with low expense of using them. Quotations can be prepared quickly by people with relatively less skill and training. (iv) Disadvantages : inflexibility and rate is either too high or too low for most individual.
Types of rates (1) Class and manual rates
(i) certain recognizable characteristics that affect the frequency or severity of loss and the effects may be estimated with reasonable accuracy. It may be possible to prepare a rating schedule to calculate the rate for each individual exposure. If loss exposure are too varied (多變), judgement rates must be used. (ii) Advantages : can be varied readily to match underwriter's appraisal of the loss exposures. (iii) Disadvantages : the expenses of administration.
Types of rates (2) Individual rating system
(i) Compromise between class rates and individual rates. It starts with class rates and then modify upward or downward on the basis of actual or expected loss experience of the individual insured. (ii) 3 principle forms are Schedule rating, Experience rating and Retrospective rating, which all encourage loss control and match the premium charge more precisely to the insured's loss exposures. (iii) Tend to stress the objective of responsiveness rather than stability, especially true of the retrospective rating plan in which the response is both quicker and greater in magnitude.
Types of rates (3) Merit rating plans
(1) Risk selection. (2) Risk classification. (3) Rating and rate making. (4) Policyholder's service. (5) Marketing. (6) Product design. (7) Risk management services.
Types of underwriting activities :
(1) Rejected - falls outside of underwriting standards (2) Issued on substandard basis - not deemed to be outside underwriting standards, but high risk within those standards : 3 basic options to offer substandard policy : (i) Higher premium - charge higher premium of higher risk than those standard risk as long as those higher rates may not be discriminatory. (ii) Limit policy benefits - offer lower policy limits on certain coverages or for all. Sub-limits may impose to earthquake or typhoon. (iii) Excluding certain provisions from coverage - exclude coverage for certain high risks property, insureds or operations. Most common found in commercial property and liability coverage. (3) Issued on standard basis - with standard rates fall within normal boundaries of underwriting standards. (4) Issued on preferred basis - with preferred / lowest rates fall within lowest risk boundaries of underwriting standards, but underwriters must bear in mind that should not offer rates that the Insurer cannot meet its contractual obligations to pay covered claims.
Underwriting decisions
The process of hazard recognition and evaluation, risk selection, pricing and determination of policy terms and conditions.
Underwriting defined as :
(1) Individual risk underwriting - Physical risk hazards and characteristics - Client's moral hazard and attitude to risk management - Special risk terms, limitations and conditions - Past claims experience and the frequency of losses - Appropriate premium for this risk, allowing for expenses and profit - Insurer's net retention to be held for the risk - Reinsured proportion of the risk, e.g. treaty or facultative, or both (2) Portfolio underwriting - Where large number of risks of a similar product type are overseen, involves considering product risk hazards, geographic spread of risks, total values at risk within the portfolio, etc.. - Achieve a balance over time between premium income on the one hand, and claims payments and expenses on the other, involves a profitable distribution of risks in both the long and short term.
Underwriting functions :
(1) Get a good understanding of the exposures presented (2) Assess the potential losses (3) Assess aspects that may give rise to unusually large losses (4) Evaluate the risk and determine terms and conditions
Underwriting process - the essential factor in underwriting is to get the facts. Using the facts as tools underwriters can :
(1) The chance of something happening. (2) The possibility of an adverse outcome from a particular event. (3) Financial loss - the risk of losing money.
What is risk ?
