Study 7 Learning Objectives

Question 1

L1: Explain how oral and written applications are used to gather information needed to
set up insurance policies.

Answer 1

• An application is a request for insurance. o Can be written or oral.
  o Applicant is obligated by the duty to disclose material facts and uphold utmost good faith.
  o Misrepresentation of material facts in the application can have serious consequences, and in extreme cases, cause losses to be denied or the insurance policy to be voided.
• Written applications have some benefits over oral ones.
  o Give accurate documentation of the parties’ intentions at the time the application was made, especially if signed.
  o Prompt consistent collection of clear and complete information about the risk.

Question 2

L2: Describe the key types of information commonly requested on insurance
applications.

Answer 2

• Insurance applications generally ask for the following:
  1. Named insured—applicant must have insurable interest to be covered under the policy.
  2. Policy term—effective date and expiry date of a policy define its term; requests to backdate could indicate fraud.
  3. Subject of insurance—the thing that is being insured.
  4. Loss payee—someone other than the named insured to whom the proceeds of insurance will be
  paid.
  5. Loss history—to determine risk acceptability, coverage terms, and policy conditions to offer.
  6. Prior insurance—to confirm applicant’s past loss history.
  7. Broker’s report—to state any additional info about clients based on broker’s personal knowledge of them.
  8. Signatures—becomes a declaration made by the applicant, confirming that the statements made
  are accurate.

Question 3

L3: Describe the process used to establish insurance rates

Answer 3

• Ratemaking is the process of establishing rates for each class of insurance and is carried out by actuaries.
  o The rate is the price of a unit of insurance for one year.
  o The premium is the rate times the amount of insurance purchased; it is the total cost of an
  insurance policy or a portion of a policy.

- Rates are made using the follow steps:
o Classify risks
o Gather statistics on past losses
o Calculate pure premium
o Determine total premium, including loadings
o Calculate the rate or unit cost

Question 4

L4: Explain how underwriters accept or reject risks on behalf of an insurer and calculate
the insurance premium for the risks they accept

Answer 4

• Underwriting is selecting risks and applying the established rates to the specific items
  that are to be insured.
• Underwriters decide which of the following actions to take:
  o Accept the risk
  o Reject the risk
  o Accept the risk subject to certain conditions
• Rating is applying the established rates to the specific items that are to be insured. o Computers carry out rating automatically for certain classes of insurance where there is little
  deviation from established rates and a large volume of business is written.
  o Some classes of business are rated individually using manual rating because of their complexity
  and the need for judgment.