Sample Case study on Insurance

 What is the insurance principle and what is its importance is to the insurance industry?

The insurance principle is a risk management principle that is based on assumptions of expected certain expected outcomes whereby the law of averages is applied either in theory or in practice to estimate the outcomes. The importance of this principle is that it helps the insurance companies to be able to quantify risk factors and at the same time determine the indemnity cost. Insurance companies operates on seven such principles which include the principle of utmost good faith, insurable interest nature of contract, indemnity, contribution, loss minimization,  among others.

State the Law of Large Numbers.  Then explain why it is important to the insurance industry.

The law of large numbers is a principle of probability whereby the larger the number of exposed units in a given event, the greater the probability that the actual outcome of the exposure will converge or be equal to the expected/theoretical results. This law is important to the insurance industry as it lessens the risk that otherwise would be incurred if few people were insured. The large number of people provides a basis of expectation for the insurance companies upon which the insurance rates are calculated.


What is the fundamental difference between private insurance and social insurance?

Social insurance differs from Private insurance in a number of ways. One of basic difference between the two is that the social insurance is a government/state oriented cover which provides protection against economic risks, and is mandatory for all citizens to contribute. The benefits are not tied to contributions as depicted by the private insurance which is individually /private contributions and one has to contribute in order to enjoy the benefits stipulated. In a private insurance, participation is voluntary and there are various insurer to choose from. This is unlike the social insurance where participation is mandatory, and where it is voluntary, the cost is heavily subsidized/equated to ensure universal coverage.

Explain what each of the initials in the acronym MIX-P stand for.  Explain why each element is important to the pricing of an insurance policy.

There are 7ps in marketing including but four are most important including product, price, place as well as promotion. Product means the service that is offered to the final user. Product mix is important as it helps the insurance company to design the service so that it can be appealing to the final user. Price entails the probable worth of the service and may include discount, financing and leasing costs. It is important to the insurance companies as they are able to tabulate the final price to be offered to the customers. Place refers to the placement and all those decisions that are related to distribution. To the insurance companies, place is important as they are able to know and strategies for the area to be covered the levels of service as well as the selection of the channel members. Promotion entails   communicating the product or service to the final customer. This is important to the final users as they are able to reach many customers through advertising and other means

Define each of the following terms using the language we discussed in class AND explain the importance of each term to risk management and insurance.

Risk – Risk is the potential or probability of losing something that have value in it. It is a threat of damages a result of internal or external vulnerabilities and can be prevented if a preemptive action is taken. It is important to the management of insurance as the company is able to design insurance options to cover the range of risks that may be available.

Loss Exposure:  this is the amount that one risks, or a quantified loss potential that may be incurred upon the occurrence of an incidence. It is important to the insurance company when paying premiums and when determining the extent of loss. It therefore helps in the management of insurance by informing of the overall level of risk that they can tolerate in case of an occurrence.

Odds: this is the probability for an event to occur. In the management if insurance, it helps in companies to know what policies to cover and the premiums to charge.

Peril: This is an imminent danger or probable cause that exposes an entity or a person to the risk of damage or injury and prompts an individual to purchase an insurance policy. It is important in the management of insurance as it helps to device policies that individuals can buy to indemnify against such perils

Hazard: this is a condition that increases the chances of a loss. Hazards are important in the management of insurance as they help the insurance companies in the protection/compensation of the owner against damages that are covered within the policy

Adverse selection: this is a condition where the demand for insurance and the quantity purchased correlates positively to the individual’s risk of loss. It is important in the management of insurance as it helps the insurance to enforce the principle of utmost good faith and total disclosures. It also helps them to limit their coverage or raise premiums to fight adverse selection.

Regulators review the premiums charged by an insurance company based upon three criteria.  Identify the criteria and explain why each is important to the regulatory purpose.

The regulators usually follow three guidelines to regulate insurance. These regulations relates to rates whereby they must be adequate. . This regulation ensures that companies remain solvent and are able to compensate clients even those who have large claims. It therefore helps the regulator to ensure that insurance companies are solvent and are able to meet their insurance obligations. The second criterion relates to the fact that the rates should not be excessive. This is important as it helps the regulators to protect the welfare of the contributors by making sure that they are not exploited. The rates should also not be unfairly discriminatory and must show differences in the expected claims and the expenses. The regulators therefore are able to check whether the insurance companies are exploiting their clients

Explain the difference between a pure premium rate and a gross premium rate.  What factors are included in determining each rate?

Pure premium is that fraction of the premium payment that insurance company uses to pay the probable losses while the gross premium rate is that amount that comprises of the net premium including expenses and commissions. Some factors that are included when determining the pure premium rates include the loss adjustment expenses, trending methodologies and loss development among others.

What is ultimate mortality and select mortality?  Why is ultimate mortality always going to be worse (i.e., higher) than select mortality?

Ultimate mortality is the mortality experience that the insured took cover many years ago. Select mortality entails the mortality experience of those people who have been recently insured. It is a contingency statistics for a given period of time that indicates mortality data’s for those people who have purchased life insurance and have lower mortality rates than those people who have already insured out of medical requirement or want a profitable undertaking. Ultimate mortality is always going to be worse because it is assumed to have reached ultimate and therefore has to be discontinued and payout done.

What’s the contribution principle?  How does it affect policy owner dividends?

The contribution principle is an insurance rule that elaborates the payment option in case a person has purchased insurance from multiple companies for the same event. It affects the policy owner dividend in the sense that the purchaser is only able to get the portion of cover that is proportionate to the damage from the carriers and it one of the insurance compensated the event, then there would be no proceedings from the others from the policy holder but rather, the insurance company would require a proportionate share of risk from the others.

Explain the difference between an insurer’s separate accounts and an insurer’s general account.  Why is that difference significant to the sale of VUL and UL policies?

Insurers separate account is a reporting account that is held by the insurance company, separate from the general account and enables investors to choose investing categories based on their personal risk tolerance and need for performance, while the insurers general account refers to the aggregate investment of an insurer that is used to pay claims and benefits to those who have been insured. The difference to the policy holders is important because under the UL, the excess premium above cost is credited to the cash equivalent of the policy and helps the insured to earn guaranteed level premiums, though at a lower level while the VUL has added benefits and is flexible and has an accumulating value.