General insurance

third party covers only liabilities to others (e.g. another driver or pedestrian in the event of a crash), although it will usually cover theft of and fire damage to the policyholder’s own vehicle (i.e. third party, fire and theft). comprehensive also covers accidental damage to own vehicle, as well as other perils such as theft from vehicle, vandalism etc.

group personal accident (GPA) is usually cover for a fixed amount on specified events only, negligence of employer is not required before paying out, cover may also include accidents outside work. for employers’ liability, negligence of employer is required and claim amounts will depend on severity of injury incurred.

• Consider both from the point of view of frequency and severity. The risk environment may change rapidly. If the potential maximum loss is large, the risk can be reduced by introducing a maximum pay-out in the policy.
• Comment on how heterogeneous the risks are
• Talk about anti-selection and moral hazard
• actual expenses are higher than expected
• These are likely to include extensive research and development costs at the pricing stage (which will not be recovered if the oil company chooses a different insurer)
• and any claims management costs arising.
• accumulations of risk (e.g. geographical or by class of business) and catastrophes
• new business volumes too high (leading to excess new business strain) or too low (leading to shortfall in covering overheads)
• The impact on the tail of the business. (when there is a health issue)
• If it is related to the operation of a business, it is vital to understand how the continuity of that business could be affected.
• Possible changes in Mix of business
• advance meetings with potential insureds
• involving independent experts in helping to assess the risks
• Possible exclusions
• Reinsurance, it is worth mentioning that reinsurer may also not have relevant experience and the company may face a credit risk if the reinsurer defaults. and this introduces the new risk: counterparty risk
• introducing some risk sharing (e.g. by means of a significant excess) to ensure that risks of anti‐selection and moral hazard are reduced

Reserve for: something has not occurred, incurred but not reported, outstanding claims, handle claims.
Because of the long‐term nature of most life insurance contracts, the main reserve required for an in‐force policy is an unexpired risk reserve (i.e. the EPV of future benefits and expenses minus the EPV of future premiums).

• an outstanding claims reserve, which covers claims that the insurer has been notified of but which have not yet been settled
  • such settlement delays do not happen in life insurance, as the claim amount will usually be well defined and there will usually be little doubt about the validity of any claim made
  • in many lines of non‐life insurance business, these reserves are estimated using statistical techniques (e.g. the chain ladder method)
• an incurred‐but‐not reported reserve, which covers that have occurred but have not yet been reported to the insurer
  • again, such delays in reporting are not significant in life insurances, as it is generally clear when a claim event has occurred (although this may be less clear‐cut for some critical illness contracts)
• an unexpired risk reserve
  • which, as in life insurance, relates to claims that may occur before the end of the period of cover
  • however, unlike in life insurance, as most non‐life insurance contracts are short-term and the risk is (relatively) uniform over the term of the contract, this is usually taken simply as the portion of the original premium that relates to the period of cover remaining
• a catastrophe reserve
  designed to cover the extra risks arising from concentrations of claims (e.g. from a single weather event). This is also unlikely to be significantly for life insurance, where claims of individual policies can be considered to be largely independent from one another.
• a claims handling reserve
  Due to the higher risk of unforeseen expenses due to legal actions and the greater costs of investigating potentially fraudulent claims, many lines of non‐life insurance business will also included a separate reserve in respect of claims handling expenses.

For short tail business, the main investment consideration is liquidity. This will ensure that uncertain claims outgo can be met quickly. To this end, the company is likely to invest a large proportion of its assets in cash and short-dated government bonds.
long tail business will tend be riskier, as the claim amounts will usually be subject to more uncertainty (e.g. as a result of claims inflation, retrospective legislation etc). Long tail liability claims will likely be real in nature, requiring a small proportion of the assets to be held in equities (or other real assets).

For all Companies, consider: liability, property loss, financial loss
Liability

• Employer’s liability
• Product liability
• Public liability
• environmental liability insurance
• Professional indemnity

property loss

Commercial Property – fire, theft, explosion, storm, flood, escape of water

Damage to plant and machinery

Motor vehicle (if the company has its own distribution fleet or if cars are provided to staff)

Patent protection (e.g. covering legal costs)

Key person insurance Sickness and/or critical illness insurance cover for staff Life assurance for staff

financial loss

Business interruption (consequential loss)

Pecuniary loss: third party defaults

Fidelity guarantee: third party fraud

For bigger companies:

• A much higher excess point (deductible) is likely to be employed
• Key Person. A much larger group is unlikely to be reliant on key individuals, so cover will probably not be needed unless very specialised skills are required to run the small company’s main product line. Possibly retain for a limited period.
• Damage to plant and machinery. Most damage risks are likely to be retained within the group. Insurance with a high excess point may be used as a backstop.