RISK CH.,6,7.pptx

CHAPTER FIVE: LIFE AND HEALTH INSURANCE
LIFE INSURANCE
Human life values are greater and more significant than all
other property values.
The true wealth of nation lies not in its natural resources
or its accumulated property,But in the inherent capability
of its population and the way in which this population is
employed.
1

Premature Death & Economic Justification of Life
Insurance
Premature death is the death of a family head with
unfulfilled financial obligations.
The primary purpose of life insurance is to protect
financially the insured’s family during premature death.
Life insurance is an insurance coverage that provides a
monetary benefit to an insured person's family.
2

Underwriting life insurance
Underwriting is the process through which an insurance
company evaluates the risk of a potential client.
This process allows the company to set payments and specify
coverage to the individual.
Life insurance underwriting consists of both medical underwriting
as well as non-medical underwriting.
As part of the underwriting process, health information may be
used in making two related decisions:
i. Whether to offer or deny coverage; and
ii. What premium rate to set for the policy. 3

Factors considered in life insurance underwriting (Fundining)
1. Sex: Empirical studies indicate that women live longer than men.
This may influence the underwriter lower premium payments for women
higher for men.
2. Current Physical Condition: This refers to the insured’s current
physical and health condition regarding pulse rate, heart condition,
blood pressure, lungs, nervous system, body build, weight, etc.
3. Personal Medical History: The insured’s past medical history is
examined to check for any previous illness.
4. Family Medical History: Medical history of insured family to
discover any hereditary diseased or deficiencies.
4

CHAPTER Six: LIFE AND HEALTH INSURANCE
5. Occupation: Affect chance of suffering accidents of
premature death. Some are hazardous, and increase the risk of
death. For example a coal miner risk > manager or an
accountant.
6. Insurable Interest: This involves identifying any
relationship b/n the insured & named beneficiary.
7. Habits: Habits such as drug or alcohol consumption and
smoking could lead to accidents.
8. Marital status and number of children
Hobbies (such as race car driving,
5

CHAPTER Five: LIFE AND HEALTH INSURANCE
Sources of Information for Underwriting
Pertinent information needed for underwriting is obtained from
the following sources:
Proposal Form
Medical Report
Attending Physicians Statement
Agent’s/ Salesman’s Report
Questionnaires and Interview
Underwriting Manuals
Inspection Report 6

Why Underwriting Important?
The main purposes of life insurance underwriting are:
To prevent individuals who have a higher –than –average.
To decide whether to offer or deny the coverage and
To set the premium rate for the policy
To identify uninsurable Diseases such as:
Cancer Heart disease
Diabetes Blood pressure
Overweight and underweight etc.
7

Some unique characteristics of life insurance
A.The event insured against is an eventual certainty
B.There is no possibility of partial loss in life insurance.
C.Life insurance is not a contract of indemnity
D.The requirement of insurable interest is applied somewhat
differently than in property and liability insurance.
Types of life insurance: The major types are:
Term life insurance
Whole-life insurance
Endowment insurance and Annuities.
8

CHAPTER Fve: LIFE AND HEALTH INSURANCE
1. Term insurance policy
It is a contract of life insurance protection for a limited
number of years.
The face value of the policy being payable only if
death occurs within a specified period and nothing
being paid if the insured survives.
Term insurance provides a limited number of
years/temporary protections.
9

CHAPTER Five LIFE AND HEALTH INSURANCE
Term life insurance provides the insured d/t options.
A. Decreasing term life insurance: It provides the
beneficiary with less and lesser continues each year.
If the death occurs in the first policy years, the
beneficiary receives the face amount. If the death occurs in a
succeeding years, the proceeds will be less.
10
Age/Sex: 35, male
Year Age Annual premium Death benefit
1 35 100 $ 90,000 $
2 36 100 $ 80,000 $
3 37 100 $ 70,000 $
4 38 100 $ 60,000 $
Company illustration of decreasing value term insurance for Mr. X

B. A level term policy: pays the same amount of benefits if
death occurs while the policy is in force.
And also the premium remains the same each year.
Company illustration of level term insurance for Mr, Y.
11
Age/Sex: 35, male ,smoker
Year Age Annual premium Death benefit
1 35 114 $ 100,000 $
2 36 114 $ 100,000 $
3 37 114 $ 100,000 $
4 38 114 $ 100,000 $
5 39 114 $ 100,000 $

C. Renewable term policies: allow the insured to continue the coverage age
regardless of the status of the insured’s health or other relevant factors
occupation.
The most common is yearly renewable term insurance.
Yearly renewable term insurance is issued for a one-year. Premiums increase
with the increase in age.
D. Convertible term life insurance policies: allow the insured the option of
converting the policy to a whole life policy.
When is the use of term insurance appropriate?
It is appropriate when income is limited, or temporary needs.
Term insurance can also be used to guarantee future insurability.
12

2. Endowment insurance
Insurance coverage is paid if the insured dies within a
specified period; if the insured survives to the end of the
endowment period, the face amount is paid to the policy
owner at that time.
Whole life insurance
The policy provides lifetime protection.
It is a type of permanent insurance coverage that provides
payment upon the death of the insured.
It promises to pay the beneficiary whenever death occurs.13

There are various forms of whole life insurance.
A. Ordinary life insurance (also called straight life,
continuous premium whole life, level-premium whole life) -
provides lifetime protection with premiums that are payable
for the whole life.
Premiums are to be paid at regular interval until the death
of the insured or until the achievement of a specified age limit,
100 years.
It gives permanent protection at the lower cost.
14

B. Limited Payment Whole Life Insurance
Under this insurance scheme, premiums are paid for a
definite period of time, which is determined in advance.
That is for 10, 15, 20, and 25, 30 years or up to age 65. After
the expiration of the specified time, the policy is said to be
paid-up.
The policy remains in full force for the whole of life
but premiums are payable for a limited years only.
Since premiums are to be paid for a limited period, they are
usually higher than those under the straight life insurance.
15

Rate Making for Life Insurance/ Premium determination
Ratemaking refers to the pricing of insurance. An insurance
rate is the price per unit of insurance. The process of
predicting future losses and future expenses and allocating
these to costs among the various classes of insured is called
ratemaking. Life insurance rates are influenced by three
major determinants:
A.Expected mortality rates in the insured population
B.Investment income earned by insurer from premium income
C.Expenses incurred in operating & providing services by insurer.
16

Mortality Table
Mortality table is a table that shows the number of
deaths per 1000 and expectation of life at various ages.
The probability of death expressed in a mortality table
is based on insured lives and not the whole population.
17

Example, Exhibit: Commissioners 1980 Standard Ordinary
Mortality Table, Male Lives
18
Age at
Beginni
ng
of Year
Number
Living
of Beginning
of
Designated
year
Number
Dying
During
Designated
Year
Age at
Beginni
ng
of Year
Number
Living
at Beginning
of
Designated
year
Number
Dying during
Designated
year
0 10,000,000 41,800 25 9,663,007 17,104
1 9,958,200 10,655 26 9,645,903 16,687
2 9,947,545 9,848 27 9,629,216 16,466

1. Net Single Premium
When the total net premiums paid as a single sum at the
beginning of the contract, it is called the Net Single Premium.
The net single premium (NSP) can be defined as the present
value of the future death benefit.
The NSP is based on three basic assumptions:
1.Premiums are paid at the beginning of the policy year,
2.Death claims are paid at the end of the policy
year, and
3.The death rate is uniform throughout the year. 19

Net Annual Level Premium
The policyholder pays the same amount of premium each
year. Most life insurance policies are not purchased with
a single premium because of the large amount of cash
required.
Consumers generally find it more convenient to pay for their
insurance in installment payments.
If premiums are paid annually, the net single premium must
be converted into a net annual level premium.
20

Gross Premium (GP)
When portion of all the insurer’s costs of running the
business are added to the Net Premium is called the
GP
The addition of the insurer’s costs of doing business
to the Net Premium is called Loading.
Three types of loading allowance:
21

(1) Production Expenses: Production expenses are the expenses incurred before
the agent delivers the policy, such as policy printing costs, underwriting
expenses, and the cost of the medical examination.
(2) Distribution Expenses: Distribution expenses are largely selling expenses,
such as the first year commission, advertising, and agency allowances.
(3) Maintenance Expenses: Maintenance expenses are the expenses incurred
after the policy is issued, such as renewal commissions, costs of collecting
renewal premiums, & taxes.
22

HEALTH INSURANCE
The following are selected to be dealt in this section
1. Medical expense insurance
2. Disability income insurance
1. Medical expense insurance
Provides cost of medical care for sickness and injury.
Used to meet the expanses of physical hospital
nursing, surgical expanse, and related services.
23

Medical expanses insurance is paid
under the following specific coverage’s
Hospital insurance
Surgical insurance
Physicals expanse insurance
Major medical insurance
24

Hospital insurance
Pays for medical expenses for insured in a hospital.
Provides two basic benefits.
A daily benefit is paid for room and board charges.
There are three basic approaches.
 Indemnity approach: The plan pays the actual costs of the daily services up to
some maximum limit.
 Valued approach: A fixed amount is paid for each day of hospitalization
regardless of the actual cost of the services.
 Service approach: Provides Service benefits rather than cash benefits.
25

2. Surgical Expense Insurance
The insurer covers for surgical expanses, such as physicians’
fees associated with surgeries.
3. Physician’s expanse insurance
Insurance pays a benefit for non-surgical care provided
by a physician in the hospital, the patient’s home, or in
the doctor’s office.
Some plans also pay for diagnostic X-ray and laboratory
expenses performed outside the hospital.
26

4. Major medical insurance
This insurance is also designed to pay a large
proportion of the covered expanses of a
catastrophic illness or injury.
27

CHAPTER Seven: Non life insurance
TYPES OF NON-LIFE INSURANCE POLICES
1. MOTOR INSURANCE
Motor insurance is a major class of insurance
providing the highest insurance premiums for EIC
during the past several years.
The policy provides two types of insurance cover:
Comprehensive Cover the insured for losses.
Third Party Liability which gives cover against third
party liability death or bodily injury. 28

CHAPTER Seven: Non life inurance
Additional Risks
Motor insurance policies can include Personal
Accident Benefits, (PAB) and Bandits, Shiftas &
Guerillas, (BSG) risks.
BSG Cover
A Comprehensive Motor policy; subject to additional
premium, arising out of direct or indirect actions of
bandits, Shiftas and guerillas, but excluding any third
party liability.
29

CHAPTER Seven: Non life inurance
CLASSIFICATION OF MOTOR POLICIES
The main classifications are Private Vehicles Policy
and Commercial Vehicles Policy.
PRIVATE VEHICLE POLICY
Motor vehicles that are exclusively used for private
purposes: social, domestic, pleasure or professional.
Motor vehicles used for hiring, racing, speed, testing
and the like are excluded from this policy.
30

The policy does not provide payment to the insured
in respect of:
Losses arising outside the geographical areas.
Wear and tear or depreciation of any vehicle
Mechanical or electrical breakdown of the vehicle
Damages caused by catastrophes like flood,
windstorm, earthquake, war, invasion, etc.
Any loss/damage caused by such fundamental risks
as: flood, windstorm, earthquake, war, invasion, etc.
31

2. COMMERCIAL VEHICLE POLICY
A wide range of vehicles used for transporting goods
and passengers are covered by this policy.
Premium rates differ depending on the type and use
of the vehicles insured.
The motor vehicles under this policy are classified
as follows:
32

1. Goods Carrying Vehicles
Vehicles primarily manufactured for carrying goods.
Two types
A. Own Goods: vehicles used for carrying solely the
insured’s goods, and
B. General Cartage: vehicles used for carrying goods
for hire-light vehicles and heavy vehicles.
2. Tankers: Vehicles that transport liquid substances.
33

3. Buses: These include passenger carrying vehicles
including omnibuses and micro buses which
accommodate more than 12 people including the
driver.
4. Taxis, Car-Hero Cycles: Maximum passenger seats
for taxis and car-hire is 12, including the driver’s seat.
Motorcycles are either two or three wheeled.
34

1.Special Type Vehicles: These include mobile
cranes, earth moving equipment, Ambulances,
agricultural vehicles, dumpers, fire brigade vehicles,
etc… In this policy, liability for death or bodily
injuries is excluded to:
any person in the employment of the insured
A member of the insured’s household.
Any person being carried in the insured vehicle at
35

2. BURGLARY & HOUSEBREAKING INSURANCE
This is a policy to protect property from loss by
theft.
This policy provides cover for two categories of
risk: Private Residence and Business Premises.
The policy may be issued for a maximum one year.
The property to be insured may include stocks and
materials.
36

3. FIRE & LIGHTNING POLICY.
This policy provides indemnification to the insured for
loss or damages to property by fire or lightning.
The policy is not normally issued on a long-term basis.
The policy does not cover:
Losses by theft during or after occurrence of a fire.
Loss/damage to property arising out of climatic
conditions, chemical reaction, etc…
Burning of property by order of any public authority.
Fundamental risks.
37

4. ALL RISKS POLICY
All items to be insured are listed in the Schedule
including the specification and the sum insured for
each item.
The property manly insured include gold & silver,
funs, pictures, and other jeweler items.
The maximum period for the issuance of this policy
is one year.
38

5. PUBLIC LIABILITY POLICY
This policy make payment legal liability of insured.
The Policy is issued for a maximum one year.
If the insured dies while the policy is in force, the
insurer will indemnify the personal representative of
the insured in respect of the liability incurred by the
insured.
39

6. MONEY POLICY
This policy gives cover for any loss of money.
There are two types protects from money risk: Transit
Risks and Premise Risks.
Transit Risks refer to loss of money while it is in transit
either to the premises or from premises or carrying the
money to other places for making disbursement.
In this case, insurance cover is applicable for a period of
time until the transit activity is accomplished. 40

Premise risks refer to the possibility of loss of
money kept in locked safes in the premise by
burglars, housebreakers or thieves.
The insurer, however, will not be liable for losses
caused by :
1.War and war like operations.
2.Dishonesty of any messenger or employee of the
insured
41

7. FIDELITY GUARANTEE POLICY
This policy protects employers from all direct losses
arising from any act or acts of fraud or dishonesty
committed by any of the employees.
The insured is, then, indemnified up to the amount
guaranteed by the insurer, subject to the terms and
conditions of the policy.
The insurance cover shall not exceed one year.
42

8. PLATE GLASS POLCIY
This policy protects the insured against the destruction or
breakage of the glass
The policy does not provide compensation for:
Damages directly or indirectly traceable to fire explosion,
earthquake, volcanic eruption, hostilities, sticks etc.
Cracked or imperfect glass
Damage to window frames and other fittings.
Consequential losses and any legal liability, etc…
43

9. MARINE INSURANCE
Marine insurance provide protection for the insured
for loss of or damages to the property arising out of
sea perils.
The various classes of insurance policy that are
issued under marine insurance are: Hull, Cargo and
Freight.
44

TYPES OF MARINE POLICIES
1.Time policy: The contract begins at a specified date
and terminates at a specified date.
2.Voyage Policy: Give protection to the insured from
port of departure to port of destination.
The policy terminates when the ship reaches the
desired port safely.
This policy is in most cases issued to cover cargos.
45

3. Mixed Policy (Time and Voyage Policy) : It combines
time and Voyage Policies
4. Valued Policy: It eliminates the disagreement exist
between the Insured and the Insurer as to the value of the
property when a loss occurs. The insurable value is declared
at the beginning of the policy
5. Unvalued Policy (Open Policy): The value is left to be
proved later upon the occurrence of a loss or damage.
The Insurable value is the basis for making compensation
46

Meaning of Re-insurance
Reinsurance is the shifting of part or all of the
insurance originally written by one insurer to another.
The insurance company that initially writes the policy
for the insured is called the primary insurer (ceding
company), and the insurance company that accepts
part or all of the insurance from the ceding company is
the reinsurer.
47

The amount of the insurance that the primary/ceding
insurer retains is called the retention limit (net
retention), and the amount insurance that is ceded to
the reinsurer is known as the cession.
The reinsurer may transfer some of the insurance to
another reinsurer.
The process by which a reinsurer passes risks to
another reinsurer is known as retrocession.
48

Reasons for Reinsurance
The main purposes of reinsurance are the following:
1. To increases the capacity of the insurer;
2. To stabilize profits
3. To reduce the unearned premium reserve
4. To protect against a catastrophic loss
49

Types of Re-insurance Agreement
There are two: Facultative and Treaty Reinsurance.
1. Facultative Reinsurance
Facultative Reinsurance is an optional, case-by-case
method that is used when the ceding company receives
an application for insurance that exceeds its retention
limit. If a willing reinsurer can be found, the primary
company and reinsurer can enter into a valid contract.
50

2. Treaty (Automatic) Reinsurance
Treaty (Automatic Reinsurance) involves a standing
agreement with a particular reinsurer. Treaty
reinsurance means the primary insurer has agreed to
cede insurance to the reinsurer and the reinsurer has
agreed to accept the business. The amount of
insurance sold by the primary insurer that is
transferred and the services provided by both parties
51

•Types of automatic treaties
(1) Quota share treaty (2) Surplus share treaty
(3) Excess of loss treaty (4) Reinsurance pool
1. Quota Share Treaty: Under a quota-share treaty,
the ceding company and reinsurer agree to share
premiums and losses based on some proportion. The
ceding insurer’s retention limit is stated as a
percentage rather than as a Birr amount. Premiums and
52

Pro-rata reinsurance (quote-share treaty) is the
proportionate sharing of premiums, losses, and
expenses between the primary insurer and the
reinsurer.
For example, the primary insurer may decide to retain
70% of new business and transfer 30% to the
reinsurer, and dividing income, losses, and expenses
by the same proportion.
53

2. Surplus Share Treaty: Under a surplus-share
treaty, the reinsurer agrees to accept insurance in
excess of the primary insurer’s retention limit, up to
some maximum amount.
For example, suppose that ABC property insurance has a
retention limit of Birr 200,000 (called a line) for a single
policy and those four lines or 800,000 are ceded to XYZ
reinsurer.
Assume that Birr 500,000 property insurance is issued.
54

Then ABC property insurance takes the first Birr
200,000 of insurance or two-fifths (2/5) and XYZ
reinsurer takes the remaining 300,000 or three-fifths
(3/5).
These fractions then determine the amount of loss paid
by each party.
If a Birr 50,000 loss occurs, ABC property insurance
pays 20,000 (two-fifths) and XYZ reinsurer pays the
remaining Birr 30,000 (three-fifths). 55

Amount of Policy ABC Property Insurance (line) XYZ Reinsurer
500,000 Br. 200,000 Br. 300,000
Amount of loss
Birr 50,000 20,000(50,000 x 2/5) 30,000(50,000 x 3/5)
3. Excess of Loss Treaty: An excess-of-loss treaty is designed
largely for a catastrophe loss.
Losses in excess of the primary company’s retention limit
are paid by the reinsurer up to some maximum limit.
An excess-of-loss treaty can be used to provide protection
against a catastrophic loss. 56

3. Excess of Loss Treaty:
An excess-of-loss treaty is designed largely for a
catastrophic loss.
Losses in excess of the primary company’s retention
limit are paid by the reinsurer up to some maximum
limit.
An excess-of-loss treaty can be used to provide
protection against a catastrophic loss.
57

Example, assume that the reinsurer agrees to pay all losses in
excess of Birr 50,000 up to a further Birr 200,000; the way in
which various losses are divided is as follow:
loss is Birr Primary Insurer Pays Excess Reinsurers Pay
40,000 40,000 Nil
50,000 50,000 Nil
100,000 50,000 50,000
250,000 50,000 200,000
58

4. Reinsurance Pool:
A Reinsurance Pool is an organization of insurers
that underwrites insurance on a joint basis.
Pools are formed because a single insurer alone may
not have the financial capacity to write large amounts
of insurance, but the insurers as a group can combine
their financial resources to obtain the necessary
capacity.
59

Each pool member agrees to pay a certain
percentage of every loss.
Another arrangement is similar to the excess-of-loss
reinsurance treaty.
Pool members are responsible for their own losses
below a certain amount.
Losses exceeding that amount are shared by all pool
members.
60

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