WUE

Insurance
underwriting
(non–UK)
WUE
2023-24
STUDY
TEXT
Insurance
underwriting
(non-UK)
WUE: 2023–24 Study text
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Updates and amendments

The examination syllabus on which this edition is based will be examined from 1 May 2023
to 30 April 2024.
Any changes to the exam or syllabus, and any updates to the content of this course, will be
posted online so that you have access to the latest information. You will be notified via
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2 WUE/March 2023 Insurance underwriting (non-UK)
© The Chartered Insurance Institute 2023

All rights reserved. Material included in this publication is copyright and may not be reproduced in whole or in part
including photocopying or recording, for any purpose without the written permission of the copyright holder. Such
written permission must also be obtained before any part of this publication is stored in a retrieval system of any
nature. This publication is supplied for study by the original purchaser only and must not be sold, lent, hired or given
to anyone else.
Every attempt has been made to ensure the accuracy of this publication. However, no liability can be accepted for
any loss incurred in any way whatsoever by any person relying solely on the information contained within it. The
publication has been produced solely for the purpose of examination and should not be taken as definitive of the
legal position. Specific advice should always be obtained before undertaking any investments.
Print edition ISBN: 978 1 80002 639 1
Electronic edition ISBN: 978 1 80002 640 7
This edition published in 2023
The author
Grace Maxted, LLB (Hons), ACII has worked in the London insurance market for 17 years. Her background is in
claims adjusting, specialising in professional indemnity, directors' and officers', financial institutions, employers'
liability and public and products liability insurance. Grace now trains for the CII modules from Certificate to
Advanced Diploma levels and has also provided training in the Philippines and United Arab Emirates.
The CII would like to thank Alasdair MacDonald, BA (Hons), ACII and Neil A Roff, B. Juris (U.P.E.), FIISA, ACII
for writing and updating previous editions of the study text.
The reviewers
Greg Johnson, FCII, FIII
Mahalakshmi Kannan, MBA, MS, FCII, Chartered Insurer, FIII
Wen Peng Li, ACII, CPCU
Leonard Liu, MSc, CII Diploma, O.I.L. Technical Accreditation
Jaffer Mazaal, BEng, ACII, Chartered Insurer
Acknowledgement
The CII thanks the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) for their kind
permission to draw on material that is available from the FCA website: www.fca.org.uk (FCA Handbook:
www.handbook.fca.org.uk/handbook) and the PRA Rulebook site: www.prarulebook.co.uk and to include extracts
where appropriate. Where extracts appear, they do so without amendment. The FCA and PRA hold the copyright for
all such material. Use of FCA or PRA material does not indicate any endorsement by the FCA or PRA of this
publication, or the material or views contained within it.
While every effort has been made to trace the owners of copyright material, we regret that this may not have been
possible in every instance and welcome any information that would enable us to do so.
Unless otherwise stated, the author has drawn material attributed to other sources from lectures, conferences, or
private communications.
Typesetting, page make-up and editorial services CII Learning Solutions.
Printed and collated in Great Britain.
This paper has been manufactured using raw materials harvested from certified sources or controlled wood
sources.
3
Using this study text

Welcome to the WUE: Insurance underwriting (non-UK) study text which is designed to
support the WUE syllabus, a copy of which is included in the next section.
Please note that in order to create a logical and effective study path, the contents of this
study text do not necessarily mirror the order of the syllabus, which forms the basis of the
assessment. To assist you in your learning we have followed the syllabus with a table that
indicates where each syllabus learning outcome is covered in the study text. These are also
listed on the first page of each chapter.
Each chapter also has stated learning objectives to help you further assess your progress
in understanding the topics covered.
Contained within the study text are a number of features which we hope will enhance
your study:
Activities: reinforce learning through Key points: act as a memory jogger at

practical exercises. the end of each chapter.
Be aware: draws attention to important Key terms: introduce the key concepts
points or areas that may need further and specialist terms covered in each
clarification or consideration. chapter.
Case studies: short scenarios that will Refer to: Refer to: extracts from other CII study
test your understanding of what you texts, which provide valuable information
have read in a real life context. on or background to the topic. The
sections referred to are available for you
to view and download on RevisionMate.
Consider this: stimulating thought Reinforce: encourages you to revisit a

around points made in the text for which point previously learned in the course to
there is no absolute right or wrong embed understanding.
answer.
Examples: provide practical illustrations Sources/quotations: cast further light

of points made in the text. on the subject from industry sources.
In-text questions: to test your recall of On the Web: introduce you to other
topics. information sources that help to
supplement the text.
At the end of every chapter there is also a set of self-test questions that you should use to
check your knowledge and understanding of what you have just studied. Compare your
answers with those given at the back of the book.
By referring back to the learning outcomes after you have completed your study of each
chapter and attempting the end of chapter self-test questions, you will be able to assess your
progress and identify any areas that you may need to revisit.
Not all features appear in every study text.
Note
Website references correct at the time of publication.
5
Examination syllabus
Insurance underwriting
(non-UK)
Objective
To provide knowledge and understanding of the role of underwriting including identification,
assessment and acceptance of risk, rating and relevant financial factors.
Summary of learning outcomes Number of questions

in the examination*
1. Understand the material facts and information relating to the insurance underwriting 5
process.
2. Understand underwriting procedures relating to the insurance underwriting process. 15
3. Understand insurance policies in relation to the insurance underwriting process. 10
4. Understand renewals and cancellation in relation to the insurance underwriting 3

process.
5. Understand personal insurances in relation to the insurance underwriting process. 3
6. Understand commercial insurances in relation to the insurance underwriting process. 3
7. Understand the main support/ancillary services available in the insurance industry. 2
8. Understand underwriting considerations in relation to the insurance underwriting 13

process.
9. Understand the principles and practices of pricing. 10
10. Understand pricing factors within the context of the insurance underwriting process. 5
11. Understand managing exposure within the context of the insurance underwriting 6
process.
* The test specification has an in-built element of flexibility. It is designed to be used as a guide for study and is not a statement of actual
number of questions that will appear in every exam. However, the number of questions testing each learning outcome will generally be within
the range plus or minus 2 of the number indicated.
Important notes
• Method of assessment: 75 multiple choice questions (MCQs). 2 hours are allowed for this
examination.
• This syllabus will be examined from 1 May 2023 until 30 April 2024.
• This PDF document is accessible through screen reader attachments to your web browser and has
been designed to be read via the speechify extension available on Chrome. Speechify is an
extension that is available from https://speechify.com/. If for accessibility reasons you require this
document in an alternative format, please contact us on online.exams@cii.co.uk to discuss your
needs.
• Candidates should refer to the CII website for the latest information on changes to law and practice
and when they will be examined:
1. Visit www.cii.co.uk/qualifications
2. Select the appropriate qualification
3. Select your unit from the list provided
4. Select qualification update on the right hand side of the page
Published February 2023

©2023 The Chartered Insurance Institute. All rights reserved. WUE
1. Understand the material facts and 5. Understand personal insurances in

information relating to the insurance relation to the insurance underwriting
underwriting process. process.
1.1 Explain why an underwriter needs to be aware of 5.1 Describe the basic features and typical policy cover
material facts and information in assessing a risk. of motor insurance, health insurance, household
1.2 Explain the concept of duties relating to disclosure insurance, travel insurance and extended warranties.
and representation, to whom these apply and how
the duties may be modified. 6. Understand commercial insurances in
1.3 Define the words peril and hazard as used in the relation to the insurance underwriting
insurance industry and the relationship between process.
them. 6.1 Describe the basic features and typical policy cover
1.4 Explain the significance of moral and physical of property insurance, pecuniary insurance and
hazard for underwriters and how they are liability insurance.
manifested.
7. Understand the main support/ancillary
1.5 Describe the methods used by underwriters to obtain
material facts and information.
services available in the insurance
industry.
2. Understand underwriting procedures 7.1 Describe the basic features of additional ‘support’
relating to the insurance underwriting type insurance services available with specific
reference to help lines, authorised repairers and
process.
suppliers, risk control/advice and uninsured loss
2.1 Describe the general and specific questions asked of recovery services.
proposers.
2.2 Describe the good practice/guidelines relating to 8. Understand underwriting considerations
quotations. in relation to the insurance underwriting
2.3 Explain the methods by which underwriters gather process.
material facts and information and their legal and 8.1 Describe the key underwriting criteria for motor
contractual significance. insurance, health insurance and personal
2.4 Describe the different ways in which premiums are insurances.
calculated and may be subject to taxation. 8.2 Describe the key underwriting criteria for commercial
2.5 Explain the legal significance of procedures relating property insurance, including fire and special perils,
to the issue of temporary evidence of cover, such as theft insurance, glass insurance and money
cover notes, policies and certificates of insurance. insurance.
2.6 Describe the relevance of premium payment for valid 8.3 Describe the key underwriting criteria for pecuniary
cover. insurances, including legal expense insurance and
2.7 Describe the methods used by insurers to collect business interruption insurance.
premiums including instalment facilities. 8.4 Describe the key underwriting criteria for liability
insurance, including employers’ liability, public
3. Understand insurance policies in relation liability, pollution liability, product liability and
to the insurance underwriting process. professional indemnity.
3.1 Describe the structure, functions and contents of a 8.5 Describe the key underwriting criteria for extended
policy form. warranties.
3.2 Explain the meaning and significance of common 8.6 Describe the procedures commonly used to
policy exclusions. discourage individuals from making fraudulent
3.3 Explain the meaning and significance of common claims.
policy conditions. 8.7 Describe the procedures commonly used to detect
3.4 Explain how excesses, deductibles and franchises fraudulent claims.
are used. 8.8 Explain the consequences of fraudulent claims for
3.5 Explain the distinction between warranties, the insurer, their insureds and the fraudulent
conditions and representations. claimant.
8.9 Explain how the fair treatment of customers and
4. Understand renewals and cancellation in positive customer outcomes relates to insurance
relation to the insurance underwriting policies.
process.
9. Understand the principles and practices
4.1 Describe the legal processes relating to renewals.
of pricing.
4.2 Explain how cancellation clauses operate.
9.1 Describe the sources, availability and types of data
essential to the underwriting process.
9.2 Explain the importance of claims information on
underwriting terms/premium rates.
Published February 2023 2 of 4

©2023 The Chartered Insurance Institute. All rights reserved.
7
9.3 Explain the nature of risk in terms of frequency and Reading list
severity of claims.
9.4 Explain the significance of the claims loss ratio on The following list provides details of further
premiums/acceptance of risk. reading which may assist you with your
9.5 Explain the distinction between underwriting year, studies.
policy year, accounting year and calendar year. Note: The examination will test the
syllabus alone.
10. Understand pricing factors within the
context of the insurance underwriting The reading list is provided for guidance
process. only and is not in itself the subject of the
examination.
10.1 Define risk premium and its key features.
10.2 Describe the reporting factors of expenses, return on The resources listed here will help you
capital, investment income, tax and intermediary keep up-to-date with developments and
remuneration. provide a wider coverage of syllabus topics.
11. Understand managing exposure within CII study texts

the context of the insurance underwriting Insurance underwriting (non-UK). London:
process. CII. Study text WUE.
11.1 Describe the basic factors influencing the market
cycle.
Books (and ebooks)
Bird’s modern insurance law. 12th ed. John
11.2 Describe the principles of risk accumulation.
Birds. Sweet and Maxwell, 2022.*
11.3 Describe the basic reinsurance considerations
including the types of reinsurance. Insurance theory and practice. Rob Thoyts.
Routledge, 2010.*
‘Insurance intermediaries: underwriting
agents’ in Colinvaux’s law of insurance. 11th
ed. Prof. Robert Merkin. London: Sweet &
Maxwell, 2016.
Pricing in general insurance. Pietro Parodi.
CRC Press, 2015.*
Online resources
The Insurance Institute of London (IIL)
podcast lecture series features leading
industry figures and subject experts
speaking on current issues and trends
impacting insurance and financial services.
Available online at www.cii.co.uk/learning/
insurance-institute-of-london (CII/PFS
members only).
Recent developments in general insurance
underwriting. Massimo Vascotto.
Principles and trends in general insurance
underwriting. Massimo Vascotto.
Additional articles and technical bulletins are
available under the Underwriting section of
the website at www.cii.co.uk/knowledge/
underwriting.
Periodicals
The Journal. London: CII. Six issues a year.
Post magazine. London: Incisive Financial
Publishing. Monthly. Contents searchable
online at www.postonline.co.uk.
* Also available as an eBook through eLibrary via www.cii.co.uk/elibrary (CII/PFS members only).

Reference materials
Concise encyclopedia of insurance terms.
Laurence S. Silver, et al. New York:
Routledge, 2010.*
Dictionary of insurance. C Bennett. 2nd ed.
London: Pearson Education, 2004.
The insurance manual. Stourbridge, West
Midlands: Insurance Publishing & Printing
Co. Looseleaf, updated.
The insurance manual. Sadler, John.
Stourbridge, Worcs: Insurance Publishing &
Printing Co. Looseleaf updated annually.
Examination guide
If you have a current study text enrolment,
the current examination guide is included
and is accessible via Revisionmate
(ciigroup.org/login). Details of how to access
Revisionmate are on the first page of your
study text. It is recommended that you only
study from the most recent version of the
examination guide.
Exam technique/study skills

There are many modestly priced guides
available in bookshops. You should choose
one which suits your requirements.

9
WUE syllabus
quick-reference guide
Syllabus learning outcome Study text chapter
and section
1. Understand the material facts and information relating to the insurance underwriting
process.
1.1 Explain why an underwriter needs to be aware of material facts 1A, 1B
and information in assessing a risk.
1.2 Explain the concept of duties relating to disclosure and 1A, 1C, 1D
representation, to whom these apply and how the duties may be
modified.
1.3 Define the words peril and hazard as used in the insurance 1E
industry and the relationship between them.
1.4 Explain the significance of moral and physical hazard for 1E
underwriters and how they are manifested.
1.5 Describe the methods used by underwriters to obtain material 1B, 1F
facts and information.
2. Understand underwriting procedures relating to the insurance underwriting process.
2.1 Describe the general and specific questions asked of proposers. 1F, 2B
2.2 Describe the good practice/guidelines relating to quotations. 2A
2.3 Explain the methods by which underwriters gather material facts 2B
and information and their legal and contractual significance.
2.4 Describe the different ways in which premiums are calculated 2C
and may be subject to taxation.
2.5 Explain the legal significance of procedures relating to the issue 2D, 2E
of temporary evidence of cover, such as cover notes, policies
and certificates of insurance.
2.6 Describe the relevance of premium payment for valid cover. 2F
2.7 Describe the methods used by insurers to collect premiums 2F
including instalment facilities.
3. Understand insurance policies in relation to the insurance underwriting process.
3.1 Describe the structure, functions and contents of a policy form. 3A
3.2 Explain the meaning and significance of common policy 3B
exclusions.
3.3 Explain the meaning and significance of common policy 3C
conditions.
3.4 Explain how excesses, deductibles and franchises are used. 3D
3.5 Explain the distinction between warranties, conditions and 3E
representations.
4. Understand renewals and cancellation in relation to the insurance underwriting process.
4.1 Describe the legal processes relating to renewals. 4A
4.2 Explain how cancellation clauses operate. 4B
5. Understand personal insurances in relation to the insurance underwriting process.
5.1 Describe the basic features and typical policy cover of motor 5A, 5B, 5C, 5D, 5E
insurance, health insurance, household insurance, travel
insurance and extended warranties.
6. Understand commercial insurances in relation to the insurance underwriting process.
6.1 Describe the basic features and typical policy cover of property 6A, 6B, 6C, 6D
insurance, pecuniary insurance and liability insurance.
Syllabus learning outcome Study text chapter

and section
7. Understand the main support/ancillary services available in the insurance industry.
7.1 Describe the basic features of additional ‘support’ type insurance 7A, 7B, 7C, 7D
services available with specific reference to help lines,
authorised repairers and suppliers, risk control/advice and
uninsured loss recovery services.
8. Understand underwriting considerations in relation to the insurance underwriting
process.
8.1 Describe the key underwriting criteria for motor insurance, health 5A, 5B, 5C, 5D, 8B
insurance and personal insurances.
8.2 Describe the key underwriting criteria for commercial property 6A, 8B
insurance, including fire and special perils, theft insurance, glass
insurance and money insurance.
8.3 Describe the key underwriting criteria for pecuniary insurances, 6B
including legal expense insurance and business interruption
insurance.
8.4 Describe the key underwriting criteria for liability insurance, 6C
including employers’ liability, public liability, pollution liability,
product liability and professional indemnity.
8.5 Describe the key underwriting criteria for extended warranties. 5E
8.6 Describe the procedures commonly used to discourage 8C
individuals from making fraudulent claims.
8.7 Describe the procedures commonly used to detect fraudulent 8C
claims.
8.8 Explain the consequences of fraudulent claims for the insurer, 8C
their insureds and the fraudulent claimant.
8.9 Explain how the fair treatment of customers and positive 1B, 8D
customer outcomes relates to insurance policies.
9. Understand the principles and practices of pricing.
9.1 Describe the sources, availability and types of data essential to 8A, 8B, 9A
the underwriting process.
9.2 Explain the importance of claims information on underwriting 8B, 9B
terms/premium rates.
9.3 Explain the nature of risk in terms of frequency and severity of 9C
claims.
9.4 Explain the significance of the claims loss ratio on premiums/ 9D
acceptance of risk.
9.5 Explain the distinction between underwriting year, policy year, 9E
accounting year and calendar year.
10. Understand pricing factors within the context of the insurance underwriting process.
10.1 Define risk premium and its key features. 10A
10.2 Describe the reporting factors of expenses, return on capital, 10B, 10C, 10D, 10E
investment income, tax and intermediary remuneration.
11. Understand managing exposure within the context of the insurance underwriting
process.
11.1 Describe the basic factors influencing the market cycle. 11A
11.2 Describe the principles of risk accumulation. 11B
11.3 Describe the basic reinsurance considerations including the 11C
types of reinsurance.
11
Study skills and

exam guidance
Before you begin the study text, we would encourage you to read the next couple of pages to
learn more about study skills and tips on how to approach the MCQ exam.
Study skills
While the text will give you a foundation of facts and viewpoints, your understanding of the
issues raised will be richer through adopting a range of study skills. They will also make
studying more interesting! We will focus here on the need for active learning in order for you
to get the most out of this core text.
Active learning is experiential, mindful and engaging
• Underline or highlight key words and phrases as you read – many of the key words
have been highlighted in the text for you, so you can easily spot the sections where key
terms arise; boxed text indicates extra or important information that you might want to be
aware of.
• Make notes in the text, attach notes to the pages that you want to go back to – chapter
numbers are clearly marked on the margins.
• Make connections to other CII units – throughout the text you may find ‘refer to’ boxes
that tell you the chapters in other books that provide background to, or further information
on, the area dealt with in that section of the study text.
• Take notice of headings and subheadings.
• Use the clues in the text to engage in some further reading (refer to the syllabus
reading list) to increase your knowledge of a particular area and add to your notes – be
proactive!
• Relate what you’re learning to your own work and organisation.
• Be critical – question what you’re reading and your understanding of it.
Five steps to better reading
• Scan: look at the text quickly – notice the headings (they correlate with the syllabus
learning outcomes), pictures, images and key words to get an overall impression.
• Question: read any questions related to the section you are reading to get a feel for the
subjects tackled.
• Read: in a relaxed way – don’t worry about taking notes first time round, just get a feel for
the topics and the style the book is written in.
• Remember: test your memory by jotting down some notes without looking at the text.
• Review: read the text again, this time in more depth by taking brief notes and
paraphrasing.
On the Web
Visit here for more detail on study skills: www.open.ac.uk/skillsforstudy.
Note: website reference correct at the time of publication.
Exam guidance
Answering multiple-choice questions
When preparing for the examination, candidates should ensure that they are aware of what
typically constitutes each type of product listed in the syllabus and ascertain whether the
products with which they come into contact during the normal course of their work deviate
from the norm, since questions in the examination test generic product knowledge.
Some questions are simply questions of fact, whereas others may be more progressive in
nature, requiring reasoning to determine the correct option or, perhaps, being answerable by
a process of elimination. Whatever the question, read it carefully to identify what it is really
asking. Do not assume that you 'know' what it is asking, even if the question is on a topic
about which you feel very confident; answer the question exactly as it is asked. Also, look
out for the occasional negative question (Which of the following is not …?).
Try to answer all of the questions. While there is no substitute for a good grasp of the subject
matter, and you cannot expect to pass the examination purely on guesswork, you do not lose
marks for giving a wrong answer!
You can find more information on the specific unit in the exam guide (available on the unit
page on the CII website and on RevisionMate).
On the Web
You can find more on preparing for your exam by visiting: https://www.cii.co.uk/learning/
qualifications/assessment-information/before-the-exam/.
Accessibility
The CII has produced a policy and guidance document on accessibility and reasonable/
special adjustments. The purpose of this is to ensure that you have fair access to CII
qualifications and assessments.
On the Web
The ‘Qualifications accessibility and special circumstances policy and guidance’ document
can be found here: https://www.cii.co.uk/media/10129005/cii-qualifications-accessibility-
and-special-circumstances-policy-and-guidance.pdf.
13
Introduction
Insurance is a truly international industry, with thriving and innovative markets across
the globe.
Some markets are well-established – others just emerging – all with their own ways of
working that reflect the characteristics and cultures of the region.
There are, however, activities common to all markets that are fundamental to the business of
insurance no matter where in the world they take place: those of underwriting and paying
claims.
This unit aims to provide you with an understanding of the basic principles of underwriting
which you can then apply to the specifics of your own region.
Please note that although regional examples are given in the text to help bring topics
to life, they are for illustrative purposes only and will not be tested.
A good place to start is to understand the origin of the term ‘underwriting’. In the early days
of marine insurance, the details of a ship or cargo to be insured would be described on a
piece of paper called a slip. The person who was to carry the risk would read the slip and
then sign under the details of the risk. In this way, the person carrying the risk became
known as the underwriter.
The underwriting process is more complicated today but the term still applies.
Insurance is based on the concept of the common pool. Contributions, in the form of
premiums, from many people go into this pool out of which the losses of the few are met. In
essence, the task of the underwriter is to manage this pool as effectively and profitably as
possible by:
• assessing the risk which people bring to the pool;
• deciding whether or not to accept the risk, or how much to accept;
• determining the terms, conditions and scope of cover to be offered; and
• calculating a suitable premium.
Our course of study will encompass underwriting procedures, considerations applicable to
the main classes of general insurance business, the structure and content of policy
wordings, premium payment, renewal and cancellation, as well as the main aspects of rating.
The developments in related products and services are also discussed, and we conclude by
introducing the principles involved in managing the underwriting account.
15
Contents
1: Material information and facts
A Utmost good faith 1/2
B Material information and material facts 1/3
C Duty of disclosure 1/4
D Non-disclosure and misrepresentation 1/6
E Physical and moral hazards 1/6
F Obtaining material information 1/7
2: Underwriting procedures
A Quotations 2/2
B Proposal forms, new business declarations and statements of fact 2/3
C Premium calculation 2/6
D Policies, cover notes and certificates of insurance 2/8
E Contract certainty 2/9
F Premium payment 2/10
3: Insurance policies
A Structure, form and content 3/2
B Exclusions/exceptions 3/5
C Conditions 3/7
D Excesses, deductibles and franchises 3/9
E Warranties, conditions and representations 3/9
4: Renewals and cancellation

A Renewals 4/2
B Cancellation 4/3
5: Insurance products: personal insurances

A Motor insurance 5/2
B Health insurance 5/6
C Household insurance 5/8
D Travel insurance 5/12
E Extended warranties 5/13
6: Insurance products: commercial insurances

A Property insurance 6/2
B Pecuniary insurance 6/6
C Liability insurance 6/9
D Cyber insurance 6/12
7: Related services
A Helplines 7/2
B Authorised repairers and suppliers 7/3
C Risk control and advice 7/3
D Uninsured loss recovery services 7/4
8: Underwriting considerations
A Basic principles of underwriting 8/2
B Specific underwriting considerations 8/3
C Fraud: prevention, detection and consequences 8/6
D Fair treatment of customers 8/8
9: Establishing the price: rating factors

A Data required 9/2
B Importance of claims information 9/4
C Frequency and severity of claims 9/5
D Claims loss ratios 9/6
E Account performance and monitoring 9/7
10: Establishing the price: pricing factors

A Risk premium 10/2
B Expenses 10/5
C Return on capital employed (ROCE) 10/6
D Investment income 10/6
E Tax 10/7
11: Managing exposure

A Market cycle 11/2
B Risk accumulation 11/3
C Reinsurance 11/4
Self-test answers i
Legislation xiii
Index xv
Chapter 1
Material information
1
and facts
Contents Syllabus learning
outcomes
Introduction
A Utmost good faith 1.1, 1.2
B Material information and material facts 1.1, 1.5, 8.9
C Duty of disclosure 1.2
D Non-disclosure and misrepresentation 1.2
E Physical and moral hazards 1.3, 1.4
F Obtaining material information 1.5, 2.1
Key points
Question answers
Self-test questions
Learning objectives
After studying this chapter, you should be able to:
• explain the principles of utmost good faith;
• define material information and facts and give examples;
• explain the principles of the duty of disclosure;
• explain the consequences of non-disclosure and misrepresentation;
• explain the similarities and differences between peril and hazard;
• explain moral and physical hazard and how they relate to the insurance underwriting
process; and
• describe the methods used by underwriters to obtain material information.
Chapter 1 1/2 WUE/March 2023 Insurance underwriting (non-UK)
Introduction
As mentioned in the introduction, the role of an underwriter involves ‘assessing the risk
which people bring to the pool’. Part of this assessment involves material information and
material facts. The purpose of this chapter is to focus on the importance of material
information and facts in that assessment, the duty of disclosure, and to examine the
significance of physical and moral hazard for underwriters. We shall also look at the ways in
which underwriters obtain material information and facts.
You will study the legal principles that apply to insurance in depth elsewhere in your course
of study. However, to understand the concept of material information, we shall begin this
chapter by reviewing the important principle of utmost good faith which is central to the
buying and selling of insurance.
Key terms
This chapter features explanations of the following ideas:
Acceptance Brokers Consideration Duty of disclosure

Material facts Material information Misrepresentation Moral hazards
Non-disclosure Offer Perils Physical hazards
Policy wording Proposer Utmost good faith
A Utmost good faith

A contract is an agreement between two parties which is legally binding. However, not all
agreements are legal contracts. For a contract to be legally binding, certain elements must
be present. These include:
• an offer;
• acceptance of the offer; and
• consideration, i.e. a benefit received by one party in return for a promise of the
performance of an act by another party.
Elsewhere in your course of study you will learn that there are other important elements
which must also be present, but for the purposes of this course we are going to focus on
these three aspects.
Using an insurance contract as an example we can see more easily how they apply in
practice.
Example 1.1
Mr Ali provides information to Success insurers and requests a quote for motor insurance.
On the basis of this information, Success provides a quotation to Mr Ali. This constitutes
the offer.
If Mr Ali accepts the quotation, this constitutes an acceptance.
Mr Ali will then pay a premium. This constitutes the consideration provided for Success
agreeing to insure Mr Ali’s vehicle.
Most contracts are dealt with under a legal principle known by a Latin term, caveat emptor,
or buyer beware. There are statutes in some countries which also apply, giving protection to
consumers against unfair practices.
Insurance contracts are different, as they are based on a promise to do something in the
event that a certain set of circumstances occurs, in exchange for payment of the premium.
However, as the promise is not tangible until a loss occurs, contracts are governed by a
different legal principle, also known by a Latin term, uberrima fides, or utmost good faith.
Chapter 1 Material information and facts 1/3
Chapter 1
This principle imposes a duty which means that any party wanting to take out insurance (i.e.
a proposer) must:
• provide all information asked for by the insurer;
• disclose facts material to the risk; and
• give any additional information relating to the risk.
The information provided is viewed as material to the subject matter of the insurance and the
insurer’s acceptance of the risk. It can be information or material facts.
It is important to emphasise that while in the eyes of the law, the proposer is the main
supplier of material information and facts (as the main party aware of the information
concerning the subject matter of the insurance), the principle of utmost good faith applies to
both the proposer and the insurer.
Example 1.2
The insurer should not withhold information from a proposer, e.g. that they are entitled to a
discount on their fire insurance following installation of a sprinkler system.
It is also important to note that if an insurer ignores or fails to act upon information supplied
by the proposer, it cannot hold this against the insured at a later date.
B Material information and material facts

Utmost good faith relies on material information and material facts being disclosed to
insurers.
The Marine Insurance Act 1906 defines material facts as:
Every circumstance is material which would influence the judgment of a prudent
insurer in fixing the premium or determining whether he will take the risk.
Think about that for a minute. How is your average person supposed to know what would
and would not influence the judgment of a prudent insurer? Does it vary by insurer? How do
you define a prudent insurer?
This point has been debated for a number of years, with many observers taking the view that
this position favoured insurers, who could hypothetically class any fact as material to their
acceptance of a risk.
Example 1.3
To address this imbalance, the Insurance Regulatory and Development Authority of India
(IRDAI) states in its Protection of Policyholders’ Interests Regulations 2002 that the
policyholder shall provide ‘all information that is sought from him by the insurer’.
In a further move to protect customers’ interests, IRDAI reviewed the 2002 Regulations
resulting in the Protection of Policyholders’ Interests Regulations 2017. It has since
introduced the Health Insurance (Amendment) Regulations 2019 to make health
insurance more transparent.
In China, too, the proposer only needs to disclose information that the insurer requests.
Information that the insurer fails to request is considered irrelevant.
It should be noted that there is no definition of ‘material information’ in Chinese Insurance
Law. However, in accordance with the Insurance Law of the People’s Republic of
China 2009, Article 16, the insurer is entitled to cancel an insurance contract if it
becomes aware of failure to disclose information by the proposer. The insurer loses this
right, however, if it does not cancel the policy within thirty days of discovering the non-
disclosure.
The Insurance Law of the People's Republic of China 2009 implies that material
information is information, requested by the insurer, which affects its decision whether or
not to insure or whether to increase the premium. Material information does not include
information that the proposer fails to disclose but the insurer knew when entering the
contract. In fact, Article 16 states that insurers are not entitled to cancel a contract if they
already knew the information or fact when entering it.
Refer to
See Fair treatment of customers on page 8/8 for more on fair treatment of customers
Both the above examples show how the responsibility to consider what might be material to
the risk has shifted from the proposer to insurer and led to a fairer treatment of customers.
Material information and material facts which must be disclosed include:
• special or unusual facts relating to the risk;
• any particular concerns which are leading to the request for insurance;
• anything which those concerned with the class of insurance and field of activity would
generally understand to be something that should be dealt with when presenting risks of
that type.
It is not necessary to disclose information considered to be public knowledge.
Example 1.4
Material information and facts are those which:
• could render the proposed risk greater than normal. For example, the proximity of a
building that is a fire hazard (e.g. a warehouse storing flammable materials) to the
premises for which fire insurance is being sought.
• might suggest a particular motive, such as an application for personal accident
insurance for a domestic worker with an exceptionally high level of cover.
Reinforce
If a circumstance or representation would influence an insurer’s decision to take the risk, it
is material.
C Duty of disclosure
The duty of disclosure exists for both parties to an insurance contract. It is the duty to inform
the other party of everything that is relevant to the contract. It is intrinsically linked to utmost
good faith.
C1 Duration of the duty of disclosure

The duty of disclosure starts when negotiations begin and applies during the life of the policy
if there is an alteration to the risk.
If an insured wishes to change a policy mid-term, such as by amending the sum insured,
description of the property, or the driving limitation under a motor policy, the duty of
disclosure applies as if a new contract is formed.
Insurers may, however, insert in their policy wording a continuing requirement to modify their
rights, thereby changing the duty of disclosure on the proposer. This will be different for
different classes of business. The following are some illustrations:
• Commercial property insurance. A policy condition requiring continuing disclosure of
removal to another location or circumstances that increase the risk of damage.
• Motor and home insurance. There is sometimes an onerous condition requiring
continuing disclosure of all material changes for the duration of the policy, not only at the
time of variations to the policy (e.g. a newly sustained conviction or an accident or loss).
Chapter 1
• Public liability insurance. By tightly defining ‘the business’ of the insured, the insured
must notify any extension of activities. This may be coupled with a condition requiring
ongoing disclosure.
C1A Pre-cover
The duty of disclosure exists from the start of the quotation process. The duty would end if a
quotation expired after its period of validity.
C1B Mid-term
Between the start of the contract and any subsequent renewal negotiation, there would only
be a duty of disclosure if there was an alteration in risk. As a continuing duty, this is implied.
Most insurers expressly state this duty as a general condition of cover under their policies.
An example of this would be an increase in the amount a building is insured for. This might
not increase the risk of a loss, but could impact its severity. For insurers needing to consider
accumulation and their capacity, it is important that this duty is observed throughout the life
of the policy. It is why they have conditions which not only control the requirement to make
such disclosures, but also to protect them in the event that the disclosure is not made (e.g.
average applying to a building).
C1C Renewal
The duty of disclosure exists at renewal. Policies are generally annual contracts (in the case
of short-term business, e.g. non-life, general insurance), renewable every twelve months. In
this scenario, it is helpful to treat the policy as a new contract at each renewal, which it is in
the eyes of the law.
C1D Claims
This duty also exists in the event of a claim. Insurers may require information to be disclosed
to them to assist in providing indemnity under the policy, and are reliant on the information
being accurate. The most obvious example of this is when submitting costs in the event of a
claim. The duty of disclosure here is closely linked to the potential for exaggeration and
fraud. Again, insurers set out the impact of an insured failing in this duty, most commonly
through use of a claims condition in their policy wordings.
C2 Disclosure by an intermediary taking out insurance

Where an insurance contract is entered into on the instruction of one party by an agent or
intermediary, they must disclose:
• all the facts communicated to them by the proposer; and
• any additional information they are aware of.
The proposer must use due diligence to communicate all information to their intermediary. In
effect, the duty on the intermediary is no different to the duty on the proposer, as they are
acting on the proposer's behalf.
C3 Facts that do not need to be disclosed

Facts that do not need to be disclosed can be grouped as follows:
• facts of law;
• facts of public knowledge;
• ‘spent’ convictions, i.e. ones which can be ignored after a specified amount of time;
• facts that improve the risk;
• facts where the insurer has waived its rights to certain information;
• facts that a survey should have revealed;
• facts an insured did not know;
• facts covered by the policy terms; and
• facts that the insurer already knows, including those that its employees know.
D Non-disclosure and misrepresentation

A breach of the duty of disclosure arises in one of two circumstances:
Non-disclosure
The proposer simply fails to tell the insurer something they know, and it is something that
would have made the insurer either not enter the contract or do so on different terms.
Misrepresentation
This is where a statement is substantially false, relates to the subject matter of the proposal,
and has led the insurer to enter the contract.
D1 Fraudulent breach of duty

If the non-disclosure or misrepresentation is fraudulent (also known as ‘concealment’):
• the policy is voidable;
• the insurer can keep the premium and sue for damages; and
• the insurer can ignore the breach of good faith, in which case the policy continues and
the insurer would have to pay the claim.
E Physical and moral hazards

The insurance industry commonly uses the words ‘hazard’ and ‘peril’ in particular ways, with
specific meanings. The easiest way to define them is to view hazard in relation to peril:
• A peril can be defined as that which gives rise to a loss.
• A hazard can be defined as that which influences the operation of the peril.
Example 1.5
Consider insuring a wooden structure against fire. Fire would be the prime cause of the
loss, but the wood enables the fire to spread more quickly and cause more damage, if a
fire occurs. Here, fire would be the peril, and the wood, the hazard.
Hazard can be further broken down as follows:

• Physical hazard: this relates to the physical nature of the risk and includes any
measurable dimension of the risk. Examples include:
– motor insurance – age of driver, condition of vehicle etc.;
– security protection at a shop – better security systems equal lower physical hazard;
and
– personal accident and sickness – proposer’s occupation (for insurance, a construction
worker would present a higher risk than a clerical worker);
– property construction – the higher the construction standard, the lower the physical
hazard as the building will be more resistant to damage.
• Moral hazard: this arises from the attitude and conduct of people. It is usually the
conduct of the insured. However, the conduct of the insured’s employees and society as a
whole are also examples of moral hazard such as:
– carelessness – a driver’s lack of care can increase the chance of an accident and its
severity;
– dishonesty – a person who has previously made fraudulent or exaggerated claims
represents a greater moral hazard than one who hasn’t; and
– social attitudes which do not regard cheating insurers as immoral or illegal.
It is sometimes difficult to distinguish between physical and moral hazards, as one is often
symptomatic of the other. Take, for example, poor factory management. This would be a
moral hazard (attitude/behaviour), but may manifest itself as a poor physical hazard, e.g.
unguarded machinery, not having signs indicating flammable materials or a non-smoking
policy.
Chapter 1
Question 1.1
Which type of hazard causes insurers the greatest difficulty when quoting for a new
risk: moral or physical? Why?
F Obtaining material information

The proposal form is the most common way for the underwriter to obtain information
regarding the risk. There are, however, alternative ways of obtaining material information
available to underwriters, their use depending on the class of business involved.
F1 Brokers
Brokers are used extensively in arranging commercial insurances, where their role may
extend to preparing documentation for use by the underwriter in the assessment of a risk.
This documentation can be extensive and may include a variety of information such as risk
registers which would include individual exposures and claims experience, site inspection
reports and preparation of health and safety reports.
Brokers also have their own risk surveyors and they will create reports, which could form
part of the market submission or could be used by the brokers internally to gain a better
understanding of the risk.
F2 Risk surveys
Risk surveys are often used to obtain information where the risk is large and/or complex
such as in many commercial insurance risks.
It is the risk surveyor’s role to act as the ‘eyes and ears’ of the underwriter and prepare a
report for the underwriter covering a number of features including:
• a full description of the risk;
• an assessment of the level of risk; and
• a measure of the estimated maximum loss (EML), which is the maximum the surveyor
believes will be the subject of a loss.
If appropriate, the report will also include a list of risk improvements the surveyor considers
necessary.
F3 Supplementary questionnaires
These are used by some insurers when dealing with particular aspects of risk.
There are many areas where questionnaires can be used, for example:
• money risks involving very high-value transactions;
• fire risks in respect of old or obsolete buildings; and
• public liability risks involving, for example, hair or beauty salons where the use of certain
products may require further investigation.
F4 Meeting with clients

This method is used most often in the case of commercial insurances.
F5 Call centres
Many insurers now operate call centres for their personal lines and small business
operations. These centres are considered to be very cost effective with supporting computer
systems which process documentation very quickly. To cut costs further many insurers have
moved these operations overseas.
F6 Internet
For simple risks, insurers may make use of technology where material information is
declared following a series of questions on a website.
Question 1.2
What type of business do you think is suited to call centre and internet-based
solutions?
Chapter 1
Key points
The main ideas covered by this chapter can be summarised as follows:
Principles of utmost good faith
• The principle of utmost good faith imposes a duty on proposers to:

– provide all information asked for by the insurer;
– disclose facts material to the risk; and
– give any additional information relating to the risk.
What are material information and material facts?
• Material information is something that has a bearing on the risk insured.

• A material fact is one that would influence an insurer’s decision to take a risk and on
what terms.
Duty of disclosure
• The duty of disclosure exists for both parties to an insurance contract. It is the duty to
inform the other party of everything that is relevant to the contract.
• The duty of disclosure starts when negotiations begin and applies during the life of the
policy if there is an alteration to the risk.
• Insurers may insert in their policy wording a continuing requirement to modify their
rights, thereby changing the duty of disclosure on the proposer.
Consequences of non-disclosure and misrepresentation
• A breach of the duty of disclosure may arise in two circumstances: non-disclosure,

where the proposer neglects to tell the insurer something, and misrepresentation,
where a statement made to the insurer is substantially false.
Physical and moral hazard
• A peril can be defined as that which gives rise to a loss.

• A hazard can be defined as that which influences the operation of the peril.
• A physical hazard relates to the physical nature of the risk and includes any
measurable dimension of the risk.
• A moral hazard arises from the attitude and conduct of people.
Obtaining material information
• Insurers use various methods to obtain material information, for example, proposal
forms (the most common method) and risk surveys.
Question answers
1.1 Moral hazard would generally be considered the more difficult aspect of quoting for
a risk. Physical hazard is easily manifested, would be picked up quite easily by a
standard survey, and there will be rating guidelines for the more common physical
attributes of a risk.
Moral hazard is not usually very evident, and relies on the character of the insured.
To complicate matters, moral hazard often appears as a physical hazard (for
instance, poor housekeeping could result in fire hazards being left lying around),
and these could be concealed during a survey. There is no basis for rating such
moral hazards and any premium adjustment would be random at best.
1.2 Call centres and the internet are only really suitable for risks where a rules-based
solution can be provided. Examples include personal lines policies and very small
commercial policies such as for shops and offices.
Chapter 1
Self-test questions
1. What are the three essential elements of a contract?
2. What is meant by the term, 'utmost good faith'?
3. From an insurer's point of view, what is meant by a material fact?
4. Give examples of types of facts that do not need to be disclosed.
5. What are the key elements of the duty of disclosure?
6. What is misrepresentation?
7. When does the duty of disclosure apply?
8. Under what two broad circumstances may a breach of the duty of disclosure arise?
9. Explain the relationship between a peril and a hazard.
10. What are the most common methods by which an underwriter can obtain material
information regarding a risk?
You will find the answers at the back of the book
2
Chapter 2
Underwriting procedures
outcomes
Introduction
A Quotations 2.2
B Proposal forms, new business declarations and statements of fact 2.1, 2.3
C Premium calculation 2.4
D Policies, cover notes and certificates of insurance 2.5
E Contract certainty 2.5
F Premium payment 2.6, 2.7
Key points
Question answers
Self-test questions
Learning objectives
• describe the procedures relating to, and significance of, quotations, proposals, policies,
cover notes and certificates of insurance;
• apply the principles concerning the different ways in which premiums are calculated; and
• describe the methods used to calculate premiums.
2/2 WUE/March 2023 Insurance underwriting (non-UK)
Introduction
We have now learnt how fundamental the duty of disclosure is to insurance cover. Proposers
Chapter 2
are required to provide all material facts that an insurer requests and must ensure that the
information they supply is full and accurate. The insurer, when in possession of all of the
relevant information, will then assess the risk in terms of the information they have, decide
whether to accept or reject it and, if they are to accept it, on what terms.
Simply put, then, underwriting can be viewed as the link between the proposal form and the
policy that comes into existence. Not every proposal that is submitted to an insurer will be
accepted. Some risks are particularly unattractive to insurers due to the likelihood of claims.
Other proposed risks are simply immoral, e.g. a jewel thief insuring stolen goods. It is at the
underwriting stage that decisions will be made.
In this chapter, we will be looking closely at the general procedures involved in this process.
Key terms
Certificates of Contract certainty Cover notes New business

insurance declarations
Policies Premium calculation Premium payment Proposal forms
Quotations Statements of fact
A Quotations
If you wanted to put new air conditioning into your home, you would most probably approach
a number of companies before having it done. Each company would give you a ‘price’ for the
work, as well as details of the benefits of their particular product. They would also identify
any terms and conditions which applied to their quotation (for example, who is responsible
for clearing the rubbish and redecorating after the air conditioning has been fitted).
In the same way, any individual or company wanting to take out insurance would want to
know the premium and the terms and conditions of the potential cover, without actually
committing to the contract and accepting the terms and conditions. In insurance, terms and
conditions are sometimes referred to as subjectivities. When this information is provided by
an insurer, it is referred to as a quotation. While it may initially be a verbal quotation this
should then be confirmed in writing in a document outlining the risk to be insured, including
any benefits or exclusions. If requested the insurer should also be able to provide a copy of
the policy wording.
This enables the insured to make the best possible informed decision and ensures that the
insurer has complied with best practice and the principle of utmost good faith, i.e. with full
disclosure of policy wording, terms and conditions. This is a key duty of insurers and existing
best practice requires insurers to ensure that their terms are well-defined, and the
information on which the quotation is based is clear to the customer.
A potential insured looking to purchase motor insurance, for example, may then approach a
number of insurers who provide motor insurance to obtain quotations, and look for the best
terms and conditions available. The services of an insurance intermediary may be used to
advise on what is available.
Remember, an insurer who then supplies a quotation to a customer does so according to the
circumstances and material facts requested by the insurer and supplied by the proposer. All
the necessary information must be obtained in order to provide a quotation to the proposer.
Chapter 2 Underwriting procedures 2/3
Activity
Priya Patel is buying a car and knows she needs motor insurance. She phones the Shivaji
Insurance Co. and asks for a quotation. Anil Gupta, the underwriter, asks Priya a number
Chapter 2
of questions, both about herself and the car. This will enable him to decide whether to
insure Priya, and if so, at what price and on what terms.
What questions would you ask Priya if you were Anil? Think of five.
A1 Quotation procedure
The procedures relating to quotations can be summarised as follows, although this list
should not be viewed as exhaustive:
• The quotation will state for how long it is valid, usually a set number of days, e.g. 30 days.
• When the quotation is issued, cover is not effective. This means the insurer is not yet
covering the risk, known as being ‘on risk’, and the proposer is not covered by the
insurance. You will recall that for a contract to come into existence there must be a valid
offer and acceptance. The quotation can be viewed as the offer and a proposer would
need to accept it before the contract comes into existence.
• Unless the insurer has withdrawn the quotation, if the proposer accepts the quotation
within the specified timescale, the insurer is legally bound to honour the quotation (on the
terms quoted).
• However, if the circumstances upon which the quotation was based change, the insurer is
not bound to maintain the quotation. Effectively, as the risk characteristics have altered,
the quotation was for a different risk. An example would be if Priya in the activity above
had an accident in the time in between quotation and acceptance, or changed to a more
expensive or powerful car.
• During the number of days stipulated, the proposer has the option to accept or decline
the quotation.
• When the period has expired and the proposer has not accepted the quotation, the
quotation is no longer valid and the insurer is not bound to honour it. The insurer may,
however, elect to do so after the expiry of the quotation.
• If no time is stipulated for the quotation to remain valid, the offer remains open for a
reasonable time, as per the general rules for the interpretation of contracts. The insurer
can withdraw the quotation at any time prior to acceptance by the proposer.
B Proposal forms, new business declarations

and statements of fact
Personal insurances
Traditionally the proposal form has been the most common mechanism by which the
underwriter receives information regarding the risk to be insured. It is completed by the
proposer and submitted to the underwriter; it can be requested directly from the insurer or it
may be provided by an intermediary. Proposal forms in their original format still exist for a
number of classes of business but in some areas have been superseded by the use of the
internet and call centres.
A proposal form may not be necessary at the point where an insurer provides a quotation.
However, if a quotation is provided without a proposal form, it will normally be subject to the
proposer completing one.
With most personal insurances, insurers are expected to replay the answers to their
questions provided by the proposer, both as part of the quotation provided, and post-sale
after going on cover. They are also expected to replay this information when mid-term
adjustments are processed and renewals are negotiated.
For those buying insurance, proposal forms also contain a declaration. The declaration
states that the information supplied by the proposer is true and accurate to the best of the
proposer’s knowledge and belief. It must be signed by the proposer.
Tele-based quotations and use of the internet

The internet has revolutionised the way insurers sell certain products, especially private
motor and household insurance, with information obtained either by a 'direct' insurer or an
Chapter 2
intermediary entirely on the telephone. The material information is established by asking the
questions that would feature on conventional proposal forms during a telephone
conversation. If the risk meets the insurer's acceptance criteria, a quotation is provided. With
telephone-based quotations, the questions asked must follow a set script. The answers are
then captured by the insurer and repeated back to the proposer, as discussed above.
Insurance is also bought more and more via the internet, with the proposer reacting to
questions posed on screen. For example, most insurers have a general acceptance
statement that deals with basic eligibility for an insurance quotation and cover; it concerns
matters such as previous insolvency, convictions etc. Changes in how customers are treated
mean that insurers cannot assume positive answers to these questions (e.g. no previous
insolvency), but rather must clearly draw a consumer’s attention to them, explain the
consequences of providing false information, and capture the response the consumer
provides.
Internet-based insurance products increasingly work to electronic systems and rule sets that
do not require validation by underwriters for individual cases, unless the answer(s) provided
in response to the insurer's question set raises a flag. In some instances, where the answer
provided is not acceptable, the system will decline to quote entirely, rather than refer it for
manual review by an underwriter. These internet-based products are usually part of home
and motor insurance which can be transacted online or over the phone. They make obtaining
insurance much quicker and, arguably in some cases, reduce insurer costs due to less
reliance on underwriters and more on rule sets and questions, which are designed by central
teams for use with the vast majority of policies they sell.
The speed of change in this area is fast and it is worth considering what the next revolution
in the insurance industry might be. Established insurers need to lead with innovation, ever
aware of the threat presented by the commoditising of personal lines insurance (e-trade,
direct, aggregators, affinity routes to market such as retail outlets, airlines), but also of the
next ‘Facebook’ that revolutionises the way we transact insurance. For example, Lemonade
is an online insurer for home insurance in the USA, promising a quotation within 90 seconds
and payment of claims within three minutes.
Insurtech
Insurtech refers to the use of new technologies and digital tools to provide insurance
services. There are many insurtech start-ups entering the insurance market with a view to
providing more innovative and efficient insurance products than those currently available.
Commercial package risks

Some commercial insurances are suitable for the types of transaction seen in the personal
lines market. These tend to be either for compulsory insurances or part of fixed packages
where the cover is up to a limit, rather than bespoke to the proposer's risk. They can be
obtained via insurance intermediaries or from the insurer directly. They usually deal with
packages for risks such as apartments/small property owners/buy-to-let investors, shops,
salons, offices, small contractors and commercial vehicles.
The technology used here is similar to that discussed above but it is fair to say that this
segment of the market is behind that of personal lines. For example, globally many major
commercial insurers have online e-trade quotation systems, but these are usually on their
own websites. Some have their products hosted by software houses, allowing brokers to
obtain multiple quotations for one risk by inputting the proposer and risk information once
(rather than once on each insurer’s website). However, functionality and availability vary
across software houses. Some only provide quotations, others are ‘full cycle’ and allow for
mid-term adjustments and renewal transactions to be processed in full, including the issuing
of a ‘point of sale’ electronic document.
A difference between the personal lines and commercial package e-trade markets is the
prevalence of personal lines insurance products available via aggregators. Aggregators exist
in both sectors but not to the same extent.
Larger commercial risks

Although proposal forms are used for most personal insurances (e.g. motor and household),
they are often insufficient for many large and complex risks (e.g. industrial complexes,
Chapter 2
satellites) because of the information required. This is also true of small- and medium-sized
commercial risks (e.g. shops and offices), which can also have more complex cover
requirements:
• For small- and medium-sized commercial risks, presentations (often prepared for the
proposer by their insurance intermediary) will be revised alongside online question sets
and factfinders/questionnaires provided by the insurer.
• For large and complex commercial risks, presentations (prepared for the proposer by
their insurance intermediary) are supplemented with insurer surveys, factfinders/
questionnaires, and even face-to-face meetings with the proposer, insurance
intermediary, and insurer.
Insurers may rely on subjectivities (conditions of a quotation that must be met) as part of
their quotation to proposers, but it is important that they are not used as ways of obtaining
information the insurer should be asking for upfront. This consolidates the overarching aim
that both the proposer and insurer are clear about the information the insurance contract is
based on, and the consequences if things go wrong, before entering into the contract. For
example, while an insurer could add a subjectivity to a quotation clarifying their
understanding that a building has elements of composite insulation panels after the proposer
had confirmed this to them during the quotation process, they could not add a subjectivity to
their quotation stating that it was based on there being no combustible composite insulation
panels. This is because the subjectivity is ambiguous (in this context, everything is
combustible if it gets hot enough), and because the insurer should be taking reasonable
steps during quotation to ensure that this is not the case.
There is a definite need for clarity between brokers and insurers, particularly following the
Grenfell Tower (UK, June 2017) and Marina Torch residence (Dubai, February 2015)
tragedies. Insurers need to help guide brokers and customers more generally about the
types of external panels and cladding available.
For businesses, proposal forms also include the declaration mentioned above and contain a
warning (or important note). The warning concerns the material information and material
facts which should be disclosed and points out the dangers if they are not disclosed. It also
states that if the proposer is in any doubt whether information is material or not, it should be
disclosed.
B1 Questions in the proposal form

These usually consist of general and specific questions.
B1A General questions
These are common to most general insurances and are usually as follows:
• proposer’s name;
• proposer’s correspondence address;
• proposer’s occupation;
• period of insurance; and
• past insurance history: has the proposer been insured before? Have they had insurance
declined? Loss record and claims experience?
B1B Specific questions

These questions are risk specific, i.e. they relate to the particular details of the risk to be
insured, and help the underwriter to determine whether or not to accept the risk and on
Chapter 2
what terms:
• proposer's risk address, e.g. their locality and related risks such as flood, subsidence, or
even theft, malicious damage, riot etc.;
• proposer's age, e.g. higher motor premiums for younger drivers;
• description of the subject matter to be insured, e.g. description of buildings in commercial
property insurance;
• business details; and
• sum insured or limit of liability.
Be aware
Specific questions vary between insurers, risks and classes of business.
You should remember that general questions may also be specific questions for certain
insurance products. For example, a proposer's occupation is also a specific question in most
commercial insurances and will influence the premium they are charged.
Activity
Insurers are increasingly making use of the internet when it comes to attracting new
customers and providing quotations. Look at a line of business that interests you on one
of the following websites or on another website from your region. See what questions the
insurer asks.
www.bajajallianz.com
www.rsadirect.ae.
Question 2.1
To make sure you are clear on what we have covered so far, can you summarise the
purpose of a proposal form?
C Premium calculation
A premium is the amount paid to an insurer in consideration of the insurer agreeing to cover
the risk.
One of the tasks of the underwriter is to calculate a suitable, or fair (equitable) premium. A
suitable premium is one that reflects the risk presented by the proposer. It is a fundamental
principle of insurance that the premiums collected for similar risks proposed form a
common pool.
The contribution of the insured (the premium) should reflect the amount of risk they present
and the likelihood of taking money out of the pool in the event of a claim.
Example 2.1
If Priya in our earlier example owns a small family car, rather than a fast sports car, she is
statistically less likely to incur accidental damage to the vehicle. Priya therefore brings a
lower risk to the pool and should therefore pay less premium than a sports car owner.
Pricing is easier for insurers when they are dealing with a large number of similar exposures
to risk, whether it is houses, cars, factories or ships. The law of large numbers enables an
insurer to determine a more accurate premium chargeable to the insured than would be the
case if its experience were limited to a few risks. However, some insurers cater for one-off
demands for insurance where it can be extremely difficult to estimate a premium (e.g. a
pianist’s fingers or a footballer’s legs).
Question 2.2
With regards to the pooling of risks, the law of large numbers assists insurers in
Chapter 2
making reliable:
a. Claims payment predictions? □
b. Investment return predictions? □
c. New business predictions? □
d. Premium income predictions? □
Premiums are usually arrived at by applying a premium rate to a premium base, with the
rate reflecting the hazard associated with the insured, and the base being the measure of the
exposure. In property-based insurance, this will normally be the value to the insured
(replacement cost) or the limit of any payment.
This could be reflected in the following formula:
sum insured × rate = premium
A scale of loadings and discounts may be applied to the above rate to reflect various
inherent risk features. The rate is a figure set by the insurer based on the likelihood that a
claim may have to be paid on the policy. A greater risk will be reflected in a higher rate, and
vice versa. For example, a firework factory would be charged a higher rate for fire insurance
than an office block. The factory contains more hazardous materials and presents a higher
risk to the common pool. The rate could be a rate per cent or a rate per mille:
• Rate per cent is the price in dollars (or the relevant currency) for each hundred dollars of
exposure (e.g. a rate of 1.5% means an insurer would charge US$1.50 for every US$100
of exposure).
• Rate per mille is the price in dollars for each thousand dollars of exposure (e.g. a rate of
2.5 per mille means an insurer would charge US$2.50 for every US$1,000 of exposure).
In some classes of insurance there is no property to insure and an alternative exposure
measure needs to be identified against which a rate can be applied. For example, for
employers’ liability insurance, the wage roll of the insured would be used. Public and
product liability policies often use turnover, and professional indemnity insurance uses fees
earned.
Question 2.3
AB Kitchen Supplies has a turnover of US$20m per year. X Insurance Co. offers
products for liability insurance with an indemnity limit of up to US$2m at a rate of 0.5
per mille on turnover. If AB Kitchen Supplies wants a higher indemnity limit of US
$5m and X Insurance Co. has quoted a rate of 0.7 per mille, what would the
premium be for:
1. US$2m indemnity?
2. US$5m indemnity?
In the above, although the increase in the limit of indemnity has risen by 150%, the premium
only increased by 40% because it is geared towards the measure of exposure (in this case
turnover) and to a lesser degree towards the limit of indemnity.
Reinforce
The premium base/exposure is the turnover, not the limit of indemnity.
C1 Adjustable premiums
In certain cases, the exposure measure is unknown at the start of the period of insurance,
and all that can be provided is an estimate of what the exposure measure might be.
Chapter 2
For example, with product liability insurance the insured can only estimate the total turnover
for the coming year. The rate is then applied to that figure, and at the end of the year, the
insured submits a declaration showing the actual turnover. The premium is then adjusted up
or down depending on whether the actual turnover was higher or lower than the estimate.
The initial premium is referred to as a deposit premium.
C2 Flat premium
In other cases, it is practice to charge a flat premium rather than apply a rate to a premium
base; for example, motor insurance, where a premium is arrived at by consulting rating
tables which take into account the hazard associated with, among other things, the individual
insured and the insured’s vehicle.
Factors that influence the premium are found on the proposal form and stored electronically.
A premium is automatically calculated on entering answers to a series of pre-programmed
questions. Many intermediaries use programs which provide quotations from various
insurers based on the rating factors provided. The advantage of this method is the ease of
updating for insurers, the ability to provide a range of accurate quotations quickly and easily,
and the reduction in the possibility of manual calculation errors.
Other risks which may be flat rated include one-off events. For example, an insured may
attend an exhibition and request public liability insurance. For such exposures an insurer
may charge a flat premium.
Example 2.2
Going back to our example of Priya wanting to insure her car:
Anil has assessed the risk to the ‘common pool’ of insuring Priya and her car. He has
decided he is willing to quote and provides Priya with a quotation of US$500. The
quotation is subject to the following terms:
• that only Priya will be allowed to drive; and
• she would be responsible for the first US$250 of every claim.
Priya is now in a position to decide whether she wants to accept the quotation.
D Policies, cover notes and certificates of

insurance
D1 Policies
The insured and the insurer need to be absolutely clear as to the terms and conditions
agreed between them, and for this reason, a policy is issued. The policy contains all the
details of the item/exposure insured, the operative perils, period of cover, exceptions,
conditions, the premium and other relevant information. The policy is effectively evidence of
the contract, and not the contract of insurance itself.
The contract of insurance comes into effect once the insurer has accepted the insurance
proposal, terms have been agreed and the premium has been paid. Therefore, the contract
exists irrespective of the existence of an actual policy document. The policy is useful as
proof in the event of a dispute over the terms agreed, but the absence of the policy
document does not invalidate the contract.
Refer to
The structure, form and content of an insurance policy is discussed in Structure, form and
content on page 3/2
D2 Cover notes
In practice, the production of the actual policy document may take some time, although it
may not be appropriate to issue a policy straight away for a number of other reasons. The
Chapter 2
following are examples of situations that may arise:
• An insurer has sufficient detail to accept a property risk but wishes a surveyor to visit the
premises and provide a survey report of the risk and establish any necessary risk
improvements that may be needed.
• An insurer may be awaiting the completion of a proposal form and is granting temporary
cover until the form arrives.
• A new employee may need to be added to a personal accident policy. The insurer may
want a declaration form completed regarding personal details, age and health. In the
interim, a cover note is issued.
There may also be mid-term changes to policies where the insurer requires some extra
information and defers the issue of policy amendment documents and/or endorsements until
further information is forthcoming. In each case, there may be a need to provide interim
evidence that cover is in force, and a cover note is prepared by the insurer and is issued to
the insured. This is particularly so in the case of some changes to motor insurance policies
(and some other compulsory insurances) where evidence of insurance is a legal
requirement.
A cover note is essentially a document issued as evidence that insurance has been
granted, pending the issue of a policy or policy amendment document and/or endorsements.
It can be a completed printed form or a letter confirming cover, or it can be produced
electronically. It states simply that insurance is in force and provides brief details of the cover
given. The cover note is temporary and is superseded once the policy and insurance
certificate are issued.
The cover note contains the following information:
• commencement date (and time period for motor insurance);
• a statement that the policy follows the normal terms and conditions of the insurer for that
class of insurance;
• risk-specific information that identifies the property or liability that is covered;
• any special terms that apply; and
• the expiry date of the cover.
As we have mentioned, cover notes are particularly important for motor insurance,
particularly in regions where there is a legal requirement to have a minimum level of
insurance cover. The cover note acts as evidence of that cover being in force.
D3 Certificates of insurance
For compulsory insurances, it is a legal requirement that a certificate of insurance is issued
to prove a policy is in force. It is evidence that a contract of insurance exists, and that the
policyholder/insured complies with the law. It is issued by the insurer in the name of the
insured.
The information to be shown on the certificate is laid down by the relevant statute which
makes the certificate compulsory.
Traditionally, motor certificates have been produced in paper format and sent by post
or by hand.
E Contract certainty
Contract certainty is achieved when all the terms are agreed between the insurer and
insured before the start of the contract. While not necessarily known as 'contract certainty',
the general concept exists in many parts of the world. In India, for example, it is achieved
with both agreement between the parties and payment of the premium.
The insurance industry is often called upon at very short notice to provide protection for
business customers wishing to transfer risk. Insurers and insurance brokers have a history of
rising to the challenge by providing protection quickly, often with limited information. In most
situations this works very well and the insurance industry provides customers with clear
protection and peace of mind.
However, there may be uncertainty, either on the part of the customer regarding exactly what
Chapter 2
level of protection has been provided or on the part of the insurer, not knowing exactly what it
is insuring.
Uncertainty may lead to disputes over what was agreed when the protection started. This
may be very important if a customer needs to make a claim against the insurance contract
and the terms of the contract are uncertain.
F Premium payment
As previously mentioned, the insurance contract comes into force once the insurer accepts
the proposal and the premium has been paid. If the premium is not paid at the acceptance of
the proposal, it is implied that the proposer promises to pay, and this promise is sufficient in
law to support a valid contract. While in some countries risks may be covered pending
payment, in India the law states the premium must be made upfront. In China 'cash before
cover' is a requirement for motor insurance and, in some provinces, for all types of
insurance. It means policy documents will not be issued until payment is received.
F1 Methods of collecting premiums

The payment for an insurance policy is referred to as the premium. This is calculated and
due at the start of the policy period. Most general insurance policies are renewable annually,
i.e. twelve months after the cover started.
Payment will usually be:
• a single upfront payment (by cash, cheque or credit/debit card);
• by credit; or
• in monthly instalments by direct debit.
F1A Instalments
Most insurers will offer the option to pay in instalments. Insurers will usually charge a fee to
reflect the loss of interest from the premium not being paid in full at the start of the policy,
and the additional administrative charges incurred in collecting on a monthly basis. It may
sometimes appear that there is no additional charge, but this will be reflected in the premium
rates. Instalments can be paid by direct debit, whereby monthly amounts are collected
automatically from the insured’s bank account.
F2 Non-payment of premium
Most insurers will insist on payment of the first premium at the time the policy is taken out or
by instalments. Cover is usually for twelve months from the start of the policy (except for
some shorter period covers such as travel insurance for a single trip).
After the twelve months the policy is said to be due for renewal, the renewal date being the
anniversary of the day on which cover started.
The premium for the renewal of the policy, the renewal premium, is advised by the insurer to
the insured by way of a renewal notice.
Refer to
See chapter 4 for more on renewals and cancellation
In the event of non-payment of the premium the policy is not renewed and cover lapses.
Key points
Chapter 2
Quotations
• An insurer who supplies a quotation to a proposer does so according to the

circumstances and material facts requested by the insurer and supplied by the
proposer.
Proposal forms
• Traditionally the proposal form has been the most common mechanism by which the
underwriter receives information regarding the risk to be insured.
• Although proposal forms are used for most personal insurances and the majority of
small and medium-sized commercial risks, they are often insufficient for many large
and complex risks.
• For those buying insurance, proposal forms also contain a declaration.
Premium calculation
• A premium is the amount paid to an insurer in consideration of the insurer agreeing to

cover the risk.
• Premiums are usually arrived at by applying a premium rate to a premium base, with
the rate reflecting the hazard associated with the insured, and the base being the
measure of the exposure.
Policies, cover notes and certificates of insurance
• The policy is effectively evidence of the contract – not the contract of insurance itself.
• For compulsory insurances, it is a legal requirement that a certificate is issued to prove
a policy is in force.
Contract certainty
• Contract certainty is achieved when all the terms are agreed between the insurer and
the insured.
Premium payment
• If the premium is not paid at the acceptance of the proposal, it is implied that the
proposer promises to pay, and this promise is sufficient in law to support a valid
contract. However, in countries where advance payments are compulsory, this delay in
payment would lead to the cancellation of cover.
Question answers
2.1 A proposal form is used to gather as much information as possible to enable the
Chapter 2
underwriter to assess the risk, and decide whether to accept it and on what terms.
2.2 a. Claims payment predictions?
2.3 It would be US$10,000 in 1 and US$14,000 in 2.

Self-test questions
1. In terms of the offer and acceptance required to form a contract, how would you view
Chapter 2
an insurance quotation?
2. What is the purpose of the declaration found within a proposal form?
3. Distinguish between general and specific questions in a proposal form.
4. What is an insurance premium?
5. Distinguish between a premium rate per cent and per mille.
6. What is a deposit premium?
7. What is a cover note?

Insurance policies
3
Chapter 3
outcomes
Introduction
A Structure, form and content 3.1
B Exclusions/exceptions 3.2
C Conditions 3.3
D Excesses, deductibles and franchises 3.4
E Warranties, conditions and representations 3.5
Key points
Question answers
Self-test questions
Learning objectives
• describe the structure, function and content of an insurance policy;
• explain why there are certain common policy exceptions and conditions;
• differentiate between excesses, deductibles and franchises;
• explain how excesses, franchises and deductibles are applied; and
• differentiate between warranties, conditions and representations.
Introduction
In Policies on page 2/8, we learnt that the insurance policy is issued to formalise what the
respective parties to the insurance contract have agreed. There are three things you should
remember about the insurance policy:
• the policy will contain the details of the terms and conditions;
• generally speaking, neither party can rely on any negotiations leading up to the contract,
only on the contract itself; and
• the policy is only evidence of the contract and not the contract itself.
Chapter 3
You can see from these three points that it is a very important document.
In this chapter, we will examine the general layout and content of a typical insurance policy.
Key terms
Arbitration Conditions Contribution Deductibles

Exceptions Excesses Franchises Fraud
Operative clause Policy schedule Representations Scheduled form
Subrogation Terrorism War Warranties
A Structure, form and content

A policy is generally issued in a scheduled form, i.e. the policy wording is pre-printed, often
in a booklet, and a schedule is incorporated into the policy. The policy schedule contains all
the variable information concerning the insured and details of the risks insured.
The schedule also usually signifies which sections of the policy are operative in relation to
the pre-printed policy form.
Every insurer has its own form of policy for the various classes of business it offers, and
these vary considerably in style and length. Style will usually be determined by company or
corporate approaches to documentation. Some companies produce policies in A4 format;
others bind them in plastic folders; others have smaller, booklet-type documents. The length
of the document will be dictated more by the class of business.
Consider this…
Why do you think commercial combined policies are longer than personal accident
policies?
A commercial combined policy, for example, provides cover for a number of sections such as
property, business interruption, employers’ liability and public liability, each of which will take
up at least one page of the policy schedule, whereas personal accident only relates
to one cover.
One further point to note relating to the general wording of policies is that insurers have often
been accused of using very complex language, shrouding policies in legal terms and small
print. In India, for example, the regulator (IRDAI) has stated that all product-related literature
has to be in language ‘easily understandable to the public’ and all technical terms clarified to
the insured. Insurers are also required to use similar language across products relating, for
example, to cover, renewals and cancellation.
In China the insurer is obliged to explain the exclusions in the policy to the proposer. Failure
to do so could result in the exclusions becoming unenforceable.
Chapter 3 Insurance policies 3/3
Consider this…
Legislation aims to ensure that insurance contracts are as clear and unambiguous as
possible. This is important, as insurance is not a tangible product, but rather a promise to
put something right when things go wrong. This is why it is essential that everyone
understands what the contract does and does not provide for, as well as each party’s
obligations.
There is a rule in contract law, known as contra proferentem, which states that any clause
considered to be ambiguous should be interpreted against the interests of the party that
Chapter 3
drafted the contract or clause. This rule gives insurers an incentive to be clear in their terms
and policy wordings.
Currently, the core terms of insurance contracts, such as exclusions, cannot be challenged
on the grounds of fairness. That said, if a term of a contract is not transparent or prominent,
it can be assessed for unfairness. Insurers, therefore, need to make sure that the significant
terms of insurance contracts are expressed in plain and intelligible language and have been
adequately brought to the insured’s attention. If a contract term is deemed unfair it will not be
binding, although consumers are still within their rights to rely on a term if they wish to do so.
Here we shall be looking at the main components of a policy. You may find it useful to obtain
a range of policy documents to compare the different approaches used.
Generally speaking, the basic structure of all general insurance policies will be the same and
include the following:
• heading;
• preamble;
• signature clause;
• operative clause;
• exclusions/exceptions;
• conditions;
• policy schedule; and
• information and facilities.
A1 Heading
Every policy will have a heading which includes the name of the insurer and in some cases,
the address and company logo.
A2 Preamble
The preamble (also known as the recital clause) sets the scene for what follows in the policy
by referring to the two parties, the insured and the insurer (although not by name), forming
the contract in terms of which the insurer undertakes to indemnify the policyholder (the
insured) in accordance with the cover detailed in the policy, in return for a price (the
premium).
Refer to
Refer back to Proposal forms, new business declarations and statements of fact on page
2/3 for a brief explanation of the declaration
The preamble also states that the proposal form is part of the basis of the contract and will
be incorporated within the policy. This effectively makes the proposal form part of the
contract, even though it is not actually reproduced and printed within the policy for all
insurance contracts. This has important implications in respect of the declaration signed by
the insured on the proposal form.
A3 Signature
Below the preamble, or close to it, there will frequently be the pre-printed signature of an
official from the company. This dates back to the times when policies were prepared by
hand. It is not strictly necessary today and many policy documents omit a signature. In China
the insurance company's stamp is used.
A4 Operative clause
The operative clause is the most important section of the policy, and is where the actual
cover provided is outlined. There may be just one clause outlining the cover or, as is more
common, a number of such clauses (as with household or motor policies), each dealing with
a different aspect of the insurance and often containing exceptions that are specific to each
individual operative clause.
Each operative clause within the policy begins with words such as, ‘The company will…’ (in
respect of insurance companies) and then states exactly what the insurer or underwriter is
promising to do, i.e. setting out the cover under the policy.
Chapter 3
A5 Exclusions/exceptions
Be aware
You may hear the terms 'exclusions' and 'exceptions' used interchangeably. For practical
purposes they mean the same thing.
All insurance policies contain some general exceptions which apply to the entire contract.
These are in addition to specific exceptions that apply to different sections under a
scheduled policy.
Example 3.1
In accordance with Insurance Law of the People's Republic of China, Article 17, the
insurer must highlight exceptions on the proposal form, insurance policy or insurance
certificate, and must tell the proposer the meaning of such exceptions orally or in writing.
Refer to
Common policy exceptions are discussed in Exclusions/exceptions on page 3/5
A6 Conditions
Refer to
We shall look at conditions in more detail in Conditions on page 3/7
A condition is essentially a contractual term that the insured agrees to comply with during
the period of cover.
Conditions are either implied or express.
Express conditions are always stated in the policy.
Implied conditions are implied by legal practice and do not need to appear in the policy.
Examples of these are:
• An insured must act as if uninsured and not use the insurance as an alternative to acting
carefully. The insured may be required to advise the appropriate authorities, depending
on the circumstances, e.g. the police in the event of damage suffered during a riot, or a
serious motor accident.
• The insured must take reasonable action to minimise a loss, e.g. attempt to extinguish a
fire (but not if it endangers the insured).
• The insured must not hinder the insurers in their investigation of a claim.
In practice, these are often stated in the policy for clarification.
In addition, many fundamental principles of insurance are implied conditions, for example:
• utmost good faith; and
• that the insured has an interest in the subject matter (normally they own it or are
responsible for insuring it, e.g. as a tenant of a building).
A7 Policy schedule
This is where the policy is made specific to the insured. The variable parts of the policy
include details such as:
• insured’s name;
• insured’s address;
• policy period;
• premium;
Chapter 3
• details of the subject matter;
• location of the risk, where applicable;
• sum insured or limit of liability;
• policy number;
• reference to special exclusions, conditions or aspects of cover; and
• operative sections of the policy.
A8 Information and facilities

This may include any, or all, of the following:
• Definitions: insurers may define a single word or phrase to embrace the wider wording
wherever the term is used. The definition will only apply if the word begins with a
capital letter.
• Customer service standards statement: for example, the response times that a
policyholder can expect from the insurer.
• Complaints procedure: this may refer to a company’s internal procedure and a nominated
person for handling complaints in the first instance. If matters are not resolved
satisfactorily, reference could be made to the local regulator or local insurance
association. However, it should be noted that all channels of dispute should be exhausted
with the insurer before being referred to relevant authorities.
• Claims information: this is particularly prevalent with motor insurance, where there may
be a ‘What to do’ section in the event of a motor accident (this should not be confused
with formal policy conditions applicable in respect of claims). There may also be a toll-free
claims hotline.
Consider this…
If insurance companies were not required to follow codes of conduct and regulations set
by relevant authorities, how would customers be affected?
B Exclusions/exceptions
Most general insurance policies will contain two types of exclusion:
• General – these apply to all sections of the policy and allow the insurer to deny cover
under the policy, regardless of the section concerned.
• Specific – these apply to particular parts of the policy. For example, under a household
contents policy there may be an exclusion relating to antiques and works of art. This
clearly wouldn’t be relevant to the buildings section.
Some general exclusions are common to all general insurance policies and are called
market or standard exclusions.
Consider this…
Before moving on, think for a few minutes about the reasons why insurers insert specific
and general exclusions in their policies. Try to imagine what sort of market exclusions
would apply to general insurance.
B1 War and related perils

War is considered a fundamental risk. It is generally regarded as being the responsibility of
the State.
You should note that marine and aviation policies may be extended to include war risks.
Consider this…
What is a fundamental risk? Are all fundamental risks uninsurable?
Chapter 3
A fundamental risk is one that applies to society generally and would normally be considered
too serious to e insured by an insurance company.
However, certain fundamental risks can be insured against in appropriate circumstances. For
example, earthquake damage would be considered a fundamental risk in certain parts of the
USA (e.g. California), although earthquake is an insurable risk elsewhere too. This difference
is due to the frequency and severity of earthquakes in the respective locations.
B2 Radioactive contamination and explosive nuclear

assemblies
This is regarded as another form of fundamental risk. It falls into two categories:
• contamination as a result of a nuclear accident; and
• liability for nuclear installations.
Potential losses are seen as beyond the capacity of individual insurers and cover is instead
provided by ‘market pools’ where insurers and reinsurers accept a share of the risk
according to their underwriting capacity.
B3 Terrorism
Terrorism is generally excluded due to its indiscriminate nature and the extent of loss
caused by terrorist attacks.
B4 Pollution and/or contamination

This exclusion is standard in all property insurance as property policies cover property only,
not the liability of the property owner. Damage to the insured’s property is covered if the
pollution or contamination results from any peril insured or if pollution/contamination causes
an insured peril to occur.
This is another exclusion driven by reinsurers who could envisage the need to treat pollution
as a risk requiring separate underwriting and management. This was particularly evident
from man-made disasters such as the Exxon Valdez oil spill in 1989 and the Bhopal disaster
in 1984.
Public liability policies are explicit about the fact that they intend to cover risks from an
unexpected, identifiable event, not a gradually operating cause. Gradual pollution can be
insured under an environmental impairment policy.
Environmental, social and governance (ESG)

The increasing interest in organisations' impact on the environment can mean there's a
reputational risk if they fall short of their obligations. In recent years, organisations have
been publishing details of their actions and initiatives in this area, collectively referred to
as environmental, social and governance (ESG).
B5 ‘E-risks’
The market introduced 'e-risks' or data exclusions following uncertainty regarding the impact
of the 'millennium bug', the continuing development of information technology and the threat
posed by cyber risks. Insurers' reactions to these exposures are evolving with more now
offering specialist, but limited, buy-back cover for cyber risks for a charge and with a
restricted amount of liability in the event of a claim. More specialist insurers continue to offer
buy-backs which are bespoke to individual business and may operate without limits, but
these are less widely available and carry higher premiums.
Question 3.1
Why do insurers have concerns about the impact of ‘e-risks’?
B6 Marine policies
Standard to all property insurance policies, its effect is to exclude material damage cover for
property also covered by a marine policy. If the marine policy cover is insufficient, however,
the property policy will respond for the excess amount.
Chapter 3
If the marine policy contains a corresponding clause, the insurers will contribute to the loss in
the proportions agreed.
B7 Contractual liability
This excludes liability involved with claims arising from an agreement entered into by the
insured and extends the insured’s responsibilities beyond the legal position. It is standard in
all motor and liability policies.
B8 Sonic bangs
Standard to all property insurance policies, damage arising from pressure waves from
aircraft or other aerial devices travelling at sonic or supersonic speeds is excluded.
C Conditions
The main ones to appear are as follows.
C1 Duties of the insured

This condition simply states that the insured must observe and fulfil all the terms of
the policy.
C2 Alteration
This extends the duty of disclosure to a continuing duty, and requires the insured to notify the
insurer of any changes that increase the risk.
C3 Action by the insured in the event of a claim

This varies from one class of insurance to another, but includes reference to how soon a
claim needs to be notified and usually the method of notification.
C4 Fraud
This condition states that the insured will lose any benefit under the policy if:
• the claim is in any way fraudulent (including being artificially inflated);
• any fraudulent means or devices are used to obtain a benefit under the policy; or
• any destruction or damage is caused by the wilful act of the insured or anyone acting on
the insured’s behalf.
C5 Reasonable precautions
This formalises the insured’s duty to take reasonable care and precautions to minimise the
risk of loss or damage or of incurring liability; an insured should not treat insurance cover as
an excuse for carelessness or inactivity.
While legislation does not preclude use of them, reasonable precaution conditions are not
viewed positively by courts and can be seen as ‘catch-alls’, i.e. a way of attempting to find a
reason to decline claims. As such, insurers are rarely able to rely on them in the event of a
loss and there is a fair challenge to why they exist in the first place, particularly when they
are implied conditions of cover.
C6 Contribution
This deals with the position of what happens if there are other policies in place covering the
same loss, e.g. when both the landlord and the tenant have policies in place covering the
building.
Contribution is the right of an insurer to call upon other insurers similarly, but not necessarily
equally, liable to the same insured in order to share the claims cost. The condition modifies
the principle by limiting insurers’ liability to their share of the loss when other policies also
exist. The insured is, therefore, obliged to claim proportionately from each insurer. For
example, a holidaymaker may take out a travel policy which covers personal possessions.
Chapter 3
Certain items such as camera equipment will usually also be covered under the all risks
section of a household contents policy. If the camera was lost or stolen while on holiday, the
policyholder would be covered under the two policies. The principle of indemnity is to place
the insured in the same position they were in before the loss occurred. In this case the
indemnity is to replace one camera. The insurers would then share the claim in agreed
proportions.
There can also be non-contribution clauses, but these are outside the scope of this course.
C7 Subrogation
Subrogation is the right of the insurer to take over the insured's rights, following payment of a
claim, in order to recover the payment (or part of it) from a third party wholly or partly
responsible for the loss. Simply put, the insurer can 'stand in the shoes' of the insured.
Example 3.2
The insurer of Radhesh Singh’s Clothing factory would indemnify Mr Singh in the event of
fire damage at the premises. If the fire damage occurred as a result of the negligent
actions of the factory’s neighbour, Mr Arjun Shah, the insurers may attempt to recover
damages from Mr Shah. Any court action would be carried out in the name of the insured
not the insurer.
The subrogation condition modifies the legal position so that an insurer is able to exercise its
subrogation rights before a payment is made.
C8 Average
This condition has the effect of reducing claims payments under property insurance policies
in proportion to any underinsurance.
It can be expressed in the following equation:
value insured under the policy
× the loss
value at risk
Example 3.3
If the policyholder insured their buildings for US$200,000, but they were valued at US
$250,000, and if then the policyholder suffered a US$50,000 loss, they would only receive
US$40,000, i.e. US$200,000 over US$250,000 × US$50,000.
This is normally calculated before the application of any excess, but individual insurers may
vary their approach.
C9 Arbitration
This clause is intended to deal with disputes relating to the amount of a claim settlement. It is
not universal. Some insurers rely on other methods to resolve disputes such as ombudsman
services (i.e. an impartial party).
C10 Cancellation
This will be discussed in greater detail in Cancellation on page 4/3.
D Excesses, deductibles and franchises

D1 Excesses
An excess is the first amount of each and every claim for which the insured is responsible.
Theoretically, the insured is their own insurer for the value of the excess. Excesses may be:
• compulsory: imposed on the insured by the insurer;
• voluntary: being accepted by the insured in return for a premium discount.
Chapter 3
Excesses appear in most classes of general insurance.
In motor insurance, a compulsory excess may be imposed on a young or inexperienced
driver for motor insurance, while an example of a voluntary excess is where an insurer offers
a premium reduction if the insured accepts an excess of, say, US$50, US$75 or US$100 in
respect of accidental damage to the vehicle.
D2 Deductibles
A deductible is, essentially, a very large excess. This is increasingly prevalent with
commercial insurances. This could be found where, for example, a large industrial company
accepts the risk for fire damage up to US$50,000, and is essentially its own insurer for
claims under this amount.
It should be noted that although there is a distinction in terms of size, in some sectors of the
market place the terms ‘excess’ and ‘deductible’ are interchangeable.
D3 Franchises
A franchise is a fixed amount or period that acts as a threshold to determine whether claims
are payable. Once the amount or period is exceeded, the claim is payable in full: nothing is
deducted. If it is not exceeded, however, nothing is payable.
Franchises are not common, but are sometimes found in engineering business interruption
insurances. Time franchises (e.g. seven days) are common with sickness cover under
personal accident and sickness insurance policies.
For example, if a policyholder had a health insurance policy with a time franchise of five days
and was off work for four days none of the claim would be payable, but if they were off for six
days, the whole claim would be payable for all six days.
Question 3.2
Parveen has a buildings policy with a sum insured of US$50,000. If he has a claim
for US$1,500, how much would his insurers pay if he had:
1. An excess of US$1,000?
2. A franchise of US$2,000?
Question 3.3
How would your answers change if the loss were US$2,500?
E Warranties, conditions and representations

E1 Warranties
Warranties are promises made by the insured relating to facts or performance concerning
the risk. It is an undertaking by the insured that:
• something will or will not be done; and/or
• a certain fact exists or does not exist.
A warranty may relate to past or present facts (i.e. a promise that something is or was so).
Or, it may be a continuing warranty in which the insured promises that a state of affairs will
continue to exist or they will continue to do something.
Warranties are used to control the aspects of a risk insurers believe are the most important.
As a result, they have the most significant impact on an insured or the subject matter if
breached.
Examples of warranties:
• Property risk – there is a warranty that the premises must be protected by a fully
operational sprinkler system.
• Marine risk – the vessel will not travel to certain parts of the world.
Warranties can be implied or express; express warranties are written and will be
Chapter 3
incorporated into the policy.
Example 3.4
It is important to note that the Indian courts are taking a similar line to that expressed in
the UK Insurance Act 2015.
In the past, breach of a warranty could invalidate the whole policy even when not
connected to the claim. Now, however, the warranty will not be imposed if the breach is
irrelevant. For example, there is a flood claim but the warranty that sprinklers are
maintained has been broken. Previously the insurer could avoid the claim but not now.
Present practice is to use term conditions wherever possible instead of warranties.
Question 3.4
Why does an insurer insert warranties into an insurance policy?
Consider this…
What happens if an insured does not comply with a warranty?
Question 3.5
Give examples of express warranties that insurers may insert in the following types
of policy:
1. Household.
2. Motor.
E2 Conditions
Policy conditions are terms, which although they are not warranties, impose important
obligations upon the insured.
The effect of a breach of condition is very serious and will vary depending on which of the
following categories the condition falls in:
• conditions precedent to the contract;
• conditions subsequent to the contract; or
• conditions precedent to liability (or to recovery).
Conditions precedent to the contract must be fulfilled before the formation of the contract.
The implied conditions (e.g. insurable interest, utmost good faith etc.) fall into this category.
Non-compliance raises doubts as to the entire contract’s validity.
Conditions subsequent to the contract must be complied with once the contract is in
force, i.e. notification of changes to the risk.
Conditions precedent to liability must be complied with for there to be a valid claim, e.g.
the claims conditions saying that a claim should be notified promptly. If not complied with,
insurers may avoid liability for a particular loss, but need not repudiate the contract as
a whole.
E3 Representations
Representations are written or oral statements made during the negotiations for a contract.
Some may contain material facts and others may not but they need to be made fully and
accurately. Representations do not normally appear in the policy.
E4 Summary and comparison

Warranties • Must be strictly and literally complied with.
• Give the insurer the right to repudiate (reject) any claim where the breach relevant to
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the loss or damage.
• Insurers must consider materiality of any breach, i.e. that the breach is related to the
loss to a large extent.
• Must be written into the policy, except where implied.
Conditions • Some implied conditions are so fundamental that they affect the whole validity of the
contract in the event of non-compliance.
• Breach of a condition subsequent to the contract (i.e. after the contract condition
becomes applicable to the insured) may allow the insurer to avoid cover under
the policy.
• Conditions precedent to liability give the insurer the right to repudiate a claim but not to
repudiate the contract as a whole.
Representations • Are written or oral statements made when negotiating a contract.

• May or may not contain material facts.
• Need to be made fully and accurately.
• Do not normally appear in the policy.
Key points
Structure, form and content
• Insurance policies are issued in a scheduled form and a schedule is incorporated into
the policy. The schedule contains all the variable information concerning the insured
and details of the risks insured.
• Policies will include the following: heading; preamble; signature and operative clauses;
Chapter 3
exceptions; conditions; policy schedule; information and facilities.
Exceptions
• Most policies will contain two types of exception (or exclusion): general exclusions and
specific exclusions.
• Some general exclusions are common to all general insurance policies and are called
market exclusions, e.g. war and related perils, terrorism.
Conditions
• Conditions include duties of the insured, action by the insured in the event of a claim,
contribution and subrogation.
Excesses, deductibles and franchises
• An excess is the first amount of each and every claim for which the insured is
responsible. They may be compulsory or voluntary.
• A deductible is a very large excess.
• A franchise is a fixed amount or period that acts as a threshold to determine whether
claims are payable.
Warranties, conditions and representations
• A warranty is a promise made by the insured relating to facts or performance

concerning a risk. It may be a continuing warranty.
• Warranties are usually express.
• Conditions fall into three groups: conditions precedent to the contract; conditions
subsequent to the contract; conditions precedent to liability (or to recovery).
• Representations are written or oral statements made during the negotiations for a
contract.
Question answers
3.1 Insurers are concerned about the cumulative effect of ‘e-risks’ as a single event
could affect a large number of policyholders. Also, policies have been developed
over time, often before the consequences of ‘e-risks’ were fully appreciated, so
insurers’ pricing mechanisms did not necessarily reflect the increased exposure.
3.2 1. US$500.
2. US$0.
Chapter 3
3.3 If the loss were US$2,500, the answer in ‘a’ would be US$1,500 (US$2,500 less
excess of US$1,000) and in ‘b’ US$2,500 (as the franchise of US$2,000 is
exceeded, the loss is paid in full).
3.4 Warranties are inserted to ensure that some aspect of good housekeeping or
management is observed, and that certain more hazardous features of a risk are
not introduced without the insurer’s knowledge.
3.5 1. A burglar alarm is fitted and is always activated when the premises are
unoccupied.
2. The motor vehicle on cover is parked somewhere safe at night.
Self-test questions
1. What are the main components of an insurance policy?
2. What is the purpose of the operative clause?
3. What is the difference between general exclusions and specific exclusions?
4. What conditions are common to most general insurance policies?

Chapter 3
5. What are the differences between an excess, a franchise and a deductible?
6. What is a warranty in an insurance policy?
7. What three groups or categories can policy conditions be divided into?
8. What are the essential differences between a warranty and a representation?

Renewals and cancellation
4
outcomes
Introduction
A Renewals 4.1
Chapter 4
B Cancellation 4.2
Key points
Question answers
Self-test questions
Learning objectives
• explain the significance of procedures relating to renewals; and
• explain the meaning and significance of the cancellation clause.
Introduction
In this chapter we examine how insurance policies can be renewed and cancelled.
Key terms
Cancellation Cost Renewal notice Statistics
A Renewals
Most general insurance policies are issued for a period of twelve months. Towards the end of
that period they are said to be due for renewal. The anniversary date is, unsurprisingly,
referred to as the renewal date.
Chapter 4
The renewal date is an important date as it allows reconsideration of the insurance by both
the insurer and policyholder. It allows the insurer to review the terms, conditions and
premium for the risk, and then for the policyholder to decide whether they want to renew the
insurance in the light of this. There is usually no obligation on either party to renew.
Although most general insurance policies are issued for a period of twelve months, insurers
would, obviously, not be too happy if all their clients only stayed with them for twelve months
and then switched insurers.
There will occasionally be a requirement for ‘one-period’ insurance. For instance, builders
often take out short-term property policies known as contract works or contractors’ all
risks cover to cover buildings in the course of erection or works on existing buildings, e.g.
extensions. The planned work may only be scheduled to last up to one year, therefore a
short-period policy will be issued.
Another example would be an organisation holding an event and wanting to insure it.
Generally, however, insurers prefer that the majority of their clients renew with them.
Consider this…
Why are insurers keen to encourage renewal of policies?
The reasons are twofold:
Statistics If the client base remains stable, statistical information about the portfolio will be more
accurate.
Cost Policy renewal is a lot cheaper than acquiring new business: think of the marketing costs
involved.
It is for these reasons that, although neither party is obliged to renew, insurers will take steps
to secure renewal of the business for a further year. This leads to the question: how does the
insurer go about trying to secure the business?
Insurers now rely on standard, automated procedures which involve sending a computer
generated renewal notice to the insured before their contract expires.
For some insurances (for example, compulsory motor insurance), insurers may also
assumptively renew policies where customers have a direct debit arrangement in place.
They will advise new customers of this and argue that the benefit to the customer is to
ensure continuous cover for a compulsory insurance. This is because it is not uncommon for
policyholders to forget to renew their policy.
The insurer does not have to invite renewal, but if it wants to keep the business it is clearly in
its interest to do so. The renewal notice will bring to the insured’s attention that the period of
insurance is coming to an end. It will also contain the renewal premium and any proposed
changes in the terms and conditions.
Chapter 4 Renewals and cancellation 4/3
Technically, if the insured wishes to renew, they will send the premium to the insurer who will
then send out confirmation of renewal (and, if appropriate, a new certificate of insurance). In
practice, however, as most premiums are paid by instalments, the insured can often simply
allow the payment of premiums to continue.
Question 4.1
Think for a few moments about the insured’s duties at renewal.
List what some of these might be.
B Cancellation
The cancellation condition in an insurance policy defines how an insurance contract can be
cancelled during its currency, generally by the insurer. The insurer usually has to send at
least seven days' written notice of cancellation by recorded delivery to the insured's last
Chapter 4
known address. It is more common to see cancellation conditions requiring longer notice
periods of up to 30 days, or restricting the circumstances in which insurers can cancel.
The insurer also undertakes to give a proportionate return of the premium for the unexpired
period. This is, however, a rarely invoked right: insurers would not cancel mid-term simply
because of a bad claims experience.
Question 4.2
In what circumstances might an insurer invoke such a cancellation condition?
An insured may also have the right to cancel mid-term but, in this case, a short-period
premium may be charged, giving a less-than-proportionate refund.
Consider this…
Why would an insurer want to charge short-period rates if a policyholder cancelled?
This is because much of the expense incurred in administrating insurance cover occurs at
the start of the policy (checking the proposal, giving quotations, setting up the policy,
reconciling the premium etc.) and if the customer cancels within that first period costs to the
insurer are high. For this reason, they want to share a proportion of those costs with the
customer, who could be said to have 'drained' some of the funds from the 'common pool'
above what might be considered reasonable.
It should be noted, however, that insurers do not always charge short-period premiums; it
depends on circumstances. The return of premium applies ‘pro-rata’, i.e. the amount
returned is in direction proportion to the number of days left until the policy expires. While an
insurer can still charge administration fees as part of the cancellation, these cannot be
disproportionately high.
In some instances, if the insured cancels the policy, no refund may be given. This is usually
where there has been a claim during the current period of the policy (note, this cannot be
done if there have been claims in a different period from the one being cancelled), as the
insurer has completed their side of the contract, i.e. provided consideration under the policy.
Key points
Renewals
• If insurers can keep their client base stable, statistics will be more accurate. Therefore,
before a renewal date, a policyholder may be invited to renew by means of a renewal
notice.
Cancellation
• Either party to the contract may cancel the contract mid-term, but there may be certain
consequences.
Chapter 4
Chapter 4 Renewals and cancellation 4/5
Question answers
4.1 To disclose details of any changes in the risk.
Examples of this could be that one of the drivers of a car had received a criminal
conviction. Or, regarding household insurance, that some work had been done to an
adjoining house to protect against subsidence.
4.2 The cancellation condition is typically brought into action when an insurer:
• discovers an important material fact that was not presented by the policyholder
prior to completion of the contract, e.g. inaccurate claims experience, insured’s
criminal convictions, fraudulent activity etc.;
• the survey report portrays the risk in a poor light increasing the insurer’s
exposures beyond acceptable levels; and/or
• the risk requirements indicated within the survey have not been completed within
the timescale agreed.
Chapter 4
Self-test questions
1. What is the purpose of a renewal notice?
2. If a policyholder cancelled their policy mid-term, why would an insurer often charge
short-period rates for the period of cover?
Chapter 4
Insurance products:
5
personal insurances
outcomes
Introduction
A Motor insurance 5.1, 8.1
B Health insurance 5.1, 8.1
C Household insurance 5.1, 8.1
Chapter 5
D Travel insurance 5.1, 8.1
E Extended warranties 5.1, 8.5
Key points
Question answers
Self-test questions
Learning objectives
• describe the basic features and typical policy cover of the insurance types detailed; and
• explain the underwriting approach and considerations for various classes of insurance.
Introduction
In this chapter we start to identify the cover and underwriting characteristics applicable to the
main classes of general insurance. We begin by examining the scope of typical policy cover
for the main types of personal insurance.
It may be useful to clarify at this point what we mean when we talk about personal
insurances. We are referring to the various policy covers required by private individuals, as
opposed to commercial insurances (covered in chapter 6) which are those required by
commercial entities such as companies and corporations.
Commercial vehicle cover has been included under personal insurances as it makes sense
to consider this at the same time as other motor insurances but it belongs more accurately to
the commercial insurance section.
Although we shall be looking at the underwriting considerations applicable to these
classes later, it is important at this stage to consider how the cover provided by the various
types of policy impacts on the underwriting of those classes.
Key terms
‘All risks’ cover Commercial vehicles Comprehensive Contents insurance

Chapter 5
cover
Exclusions Extended warranties Health insurance Household insurance
Medical expenses Motor insurance Optional extensions Personal accident
benefits
Sickness cover Third party only Travel insurance
cover
A Motor insurance
Motor insurance is compulsory in many parts of the world, including China, India and parts of
the Middle East. In many countries, insurance applies to the car, not to a named driver,
meaning anyone with a valid licence may drive it.
A1 Private motor insurance

There are generally two different levels of cover available as follows:
• third party only; and
• comprehensive.
Example 5.1
Chinese insurers do not differentiate between private motor and commercial insurance.
They categorise vehicles as:
– Motorcycles and tractors.
– Automobiles.
– Special vehicles such as bulldozers, fire engines, tanker trucks and refrigerated
vehicles.
A1A Third party only

Third party only provides:
• a set limit in respect of third party property damage cover; and
• unlimited cover in respect of third party bodily injury or death.
Chapter 5 Insurance products: personal insurances 5/3
A1B Comprehensive
Comprehensive is the widest possible protection and includes other accidental and
malicious damage to the insured vehicle.
Exclusions include:
• wear and tear;
• depreciation, i.e. reduction in the value of the vehicle following an accident;
• loss of use, i.e. costs for alternative transport while the vehicle is off the road;
• mechanical and electrical failure; and
• tyre damage from punctures or blow-outs (though any resultant damage would be
covered).
There are also a number of extensions in cover that are usually included without additional
cost. These include:
• personal accident;
• medical expenses; and
• personal effects.
It is important to make sure that you are familiar with the difference between third party cover
and comprehensive cover.
Chapter 5
Activity
Comment on what would be covered in the following situation:
Mr Lee is driving his car along a straight road when his tyre bursts and the car veers out of
control. He drives into the front wall of a house, doing serious damage to the car, the wall
and injuring himself so badly he loses an arm.
What cover would Mr Lee have with:
1. third party only cover;
2. comprehensive cover with common extensions included?
A1C Optional extensions

Optional extensions are generally available, usually for an additional premium (although
some may be included automatically).
Examples of optional extensions include the following, although there are many others:
• breakage of glass (i.e. for a non-comprehensive policy);
• scratch extension;
• personal belongings and clothing (in addition to standard cover);
• provision of a temporary replacement vehicle while the policyholder’s car is being
repaired after an accident;
• extended personal accident benefits;
• lock and key replacement cover;
• breakdown cover, i.e. roadside assistance;
• legal advice in the case of an accident; and
• legal expenses.
A1D Exclusions
There will be general and market exclusions in addition to the specific exclusions, such as
contractual liability, war risks, use other than as specified, riot and civil commotion and
sonic bangs.
A2 Private motor cycle insurance

The policy format is the same as that used in private car insurance and the same levels of
cover are available except that there is no cover for theft of accessories or spare parts
unless the motor cycle is also stolen.
Consider this…
Why would there be different restrictions on motor cycles?
There are extensions available for additional premium, such as:

• personal accident cover for the owner/driver of the vehicle when driving, travelling on and
mounting/dismounting the motor cycle. Optional personal accident cover for pillion
passengers (i.e. those riding behind the driver) or unnamed hirers may also be available;
and
• zero depreciation cover.
A3 Commercial vehicles
Although we are dealing with this class of business as part of our consideration of 'motor'
insurance, you should be aware that it is in fact a type of commercial insurance not a
personal insurance.
The main types are:
Chapter 5
• goods-carrying vehicles (from small vans to trucks);

• agricultural and forestry vehicles (such as tractors);
• carriage of passengers for hire and reward (such as taxis);
• passenger-carrying vehicles (buses, coaches and minibuses) also usually for hire or
reward but not always, e.g. if a company uses a minibus to move their employees; and
• special construction vehicles or 'special types' (e.g. ambulances, cranes, forklift trucks,
earth movers).
Like private car insurance, commercial vehicle insurance is concerned with insuring against
damage to the vehicle, and liabilities to others arising out of the use of the vehicle.
It does not usually include damage to goods carried in the vehicle as this is covered by a
goods in transit policy.
There is usually a standard policy wording, which is then modified depending on the vehicle
insured. The range of cover is the same as in private motor insurance; the cover, however,
excludes the following:
• personal accident; and
• personal effects.
It also differs depending on the use to which the vehicle is placed. There is, for example, a
different rating for vehicles used for haulage (i.e. the carriage for reward of goods belonging
to others), as distinct from carriage of own goods. Vehicles used for carrying dangerous
substances are subject to special treatment.
The third party liability section provides unlimited indemnity for death or bodily injury to
third parties, with a set limit for third party property damage.
There are also the following considerations:
• Loading/unloading: cover also applies here. An example would be dropping goods
carried on the bonnet of a car parked near the vehicle while unloading.
• Indemnity to driver: usually anyone may drive on the insured’s order/with their
permission. The vehicle may be owned by a company, yet in the event of an accident a
legal action or claim for damages may be brought against the driver, thus it is important
that the policy covers both the company and the driver to avoid any potential gaps.
• Indemnity to user: the insured may allow others to use the vehicle for social, domestic or
pleasure purposes. This allows drivers to take the vehicle home in the evening which is
far more practical in many circumstances. It should also be noted that there can be a
difference between ‘driving’ the vehicle and ‘using’ the vehicle. An example here would be
an employed chauffeur. The chauffeur is clearly the driver, though they are being
instructed by the employer, who would be the user. The detail and impact are outside the
remit of this course, but it should be remembered that there can be a difference.
• Indemnity to passengers: indemnity for their acts of negligence is covered. For
example, if a passenger opened the car door into the path of a passing cyclist, injuring
them, the cyclist might bring a claim against the driver or the passenger, so again it is
important both are covered.
• Legal costs.
There is a fairly extensive range of optional extensions available at an additional premium or
some insurers may include some of these automatically. They include:
• Medical expenses.
• Personal accident cover for paid employees such as drivers, conductors, cleaners.
• Windscreen cover; the cost of commercial vehicle windscreens can be very high and
there may be a limit on the policy. Think about the size of a windscreen on a large
articulated lorry.
• Loss of use (cover for costs of alternative arrangements while the vehicle is being
repaired).
• Increased third party property damage limit; this is especially relevant for large special
type vehicles, such as earth movers and cranes which could potentially do a lot of
damage as a result of their size and the nature of the work undertaken.
Chapter 5
• Personal belongings; this might be relevant for long-distance lorry drivers who spend
several nights on the road and may carry reasonable values of personal effects which
could be lost in the event of serious accident, fire or theft.
• Indemnity to hirers; some companies often hire out commercial vehicles either on a
regular or infrequent basis. This extension means that cover would extend to the person/
company hiring the vehicle in the event of an accident or claim.
• Sheets/ropes; this extends cover to include the large covers (tarpaulins) and ropes often
used on large open-sided lorries. These can be quite valuable and expensive to replace
(especially if they carry advertising and are printed), hence the ability to extend the policy
to cover against loss.
• Cover for damaged vehicle parts such as lamps, mudguards, bonnets, bumpers,
headlights, paintwork.
Limitations are basically the same as for private motor insurance. Standard exclusions could
include any accidental loss, damage and/or liability caused:
• outside a geographical area named in the policy;
• arising from any consequential loss;
• arising from nuclear weapons, war, invasion or warlike operations;
• caused while the vehicle insured is being used for purposes other than those in the
policy; and
• any claim arising due to contractual liability.
Mention should also be made here of fleet insurance, which is a group of vehicles under
single ownership, covered under one insurance. A minimum number of vehicles is required
before insurers will consider rating vehicles as a fleet.
Generally, the cover available is similar to that under private motor policies; however, other
covers are often included, for example:
• joint insured clause (i.e. two or more named insureds are treated as separate
policyholders if one has a claim against the other);
• roadside assistance; and
• helplines and administration.
The purpose of fleet insurance is essentially twofold:

1. To enable rating to be carried out to take account of the individual experience of the
particular policyholder. This requires a certain minimum number of vehicles to be
practical, usually ten, although on larger fleets the statistical basis becomes more
genuinely reflective of account performance. These can cover hundreds or thousands of
vehicles.
2. To reduce administration for the policyholder and insurer by having a single, multi-vehicle
policy with only one renewal date.
B Health insurance
People are exposed to many risks that may result in a reduction in their income or wealth.
Income may be reduced by death, unemployment, accidental injury, sickness or disability. In
addition, certain liabilities may increase, e.g. the costs of medical treatment. There is an
obvious need to insure some or all of these risks, and this is the object of health insurance.
Health insurance can be broken down as follows:
• Personal accident which provides payments in the event of accidental death or bodily
injury.
• Sickness cover which provides payment for disablement due to sickness.
• Medical expenses which provide cover for individuals who require treatment when they
Chapter 5
are ill or injured.

A personal accident and sickness policy is a benefit policy, i.e. a contract to pay a sum of
money in the event of a defined event occurring, whether or not the insured sustains a direct
financial loss.
An operative time of cover is defined in the policy. For example, terms such as ‘during the
policyholder’s usual occupation’ or ‘24 hours’ or ‘while travelling in the insured vehicle’.
Personal accident and sickness policies can be private, i.e. taken out by the policyholder in
respect of their own welfare, or group where a number of persons are covered under one
policy. Group policies are usually taken out by employers to protect against financial loss as
a result of illness or injury to a member of staff.
Consider this…
What financial losses could an employer suffer as a result of employee injury or illness?
The list is not exhaustive but could include lost revenue through shortfalls in production, the
cost of hiring temporary staff, continuing salary to the injured/ill employee (over and above
any standard statutory sick pay), the cost of private medical treatment for the employee
(especially if the employee is a key member of staff with vital skills), recruitment and training
costs, a lump sum payment to the family of any deceased employee or a nominal amount in
respect of funeral expenses.
Personal accident and sickness policies can be purchased as stand-alone policies, but are
often ‘add-ons’ to travel, motor, household or commercial combined insurance.
Age limits can vary with some cover restricted to those between 18 and 65 years, while
others can be as extensive as 5 to 70 years, and even this could be extended with relevant
health-related information. Cover often ranges between 16 and 70 years for accidents and
between 16 and 60 for sickness.
The level of benefit is decided beforehand and is a fixed amount irrespective of whether it is
to be paid weekly over a limited period of time and/or in a lump sum.
Be aware
It is important to remember that even though insurers need to ask for all material facts,
they are still able to exclude pre-existing conditions from health insurance cover.
Insurers do not have to expressly exclude the conditions by listing them in the policy
wording. It is enough for them to state that pre-existing conditions are excluded unless
agreed in writing by the insurer. This is a standard market exclusion, however, it is a
significant one and the insurer is, therefore, required to draw attention to it in policy
summaries and policy wordings.
B1 Personal accident benefits

The main benefit is a lump sum payable (capital benefit) in the event of:
• Death.
• Loss of limbs, eyesight, speech, hearing – the insured person must prove that the loss
is permanent and total. Most insurers require that the loss occurs within an agreed
period, i.e. 52 or 104 weeks from the date of the original injury. The lump sum payable is
made in addition to any weekly benefit paid up to the time of the loss.
• Permanent total disablement (PTD) – permanent disability can be defined as a
condition where recovery is not anticipated such as certain brain injuries or paralysis. As
above, most insurers require that the PTD occurs within an agreed period, i.e. 52 or 104
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weeks of the accident date.
• Permanent injuries that do not necessarily prevent the injured person returning to a
relatively normal lifestyle, e.g. loss of fingers or toes, can be classed as permanent
partial disablement (PPD). Insurers utilise a pre-set scale of benefits known as the
continental scale to calculate lump sum payments. For instance, the loss of one finger
may generate a lump sum of 20% of the agreed lump sum for death and PTD.
• An injury that while serious is unlikely to result in PTD is classed as a temporary total
disablement (TTD). A weekly benefit is payable for each week of disability up to an
agreed limit, usually 52 or 104 weeks. Most insurers incorporate a franchise before
dealing with a claim, usually between 7, 14 or 21 days.
Extra benefits
Certain extra benefits may be included under a policy such as:
• a daily cash allowance for medication following an accident, usually for a fixed number
of days;
• ambulance expenses – reimbursement of costs of taking the insured to hospital;
• an adaptation allowance – to cover the costs of adapting a home or vehicle in the event
of permanent disablement.
And, following the insured’s death:
• transportation or repatriation of mortal remains – a named party can be reimbursed the
cost of transporting the body to the hospital, home or cremation facility; and
• an education allowance to continue funding a child’s education.
B2 Sickness cover
Sickness or illness cover is usually offered as an extension to the personal accident policy
and provides weekly benefits for persons unable to perform any part of their normal job (i.e.
TTD). A franchise almost always applied.
So how does a franchise operate?
Most personal accident and sickness policies can be extended to include such covers as:
• Disappearance – in which the lump sum applicable for death is paid if an insured person
disappears for longer than an agreed period, e.g. six months.
• Medical treatment to speed up the period of convalescence (recuperating).
• Hospital benefits to help pay for family travel costs to hospitals.
Question 5.1
What is the difference between a benefit policy and a policy of indemnity?
There are standard exclusions under personal accident and sickness policies, for example:
• the insured being under the influence of or affected by alcohol;
• self-inflicted injury, disease or suicide;
• childbirth, pregnancy, venereal disease or HIV;
• pre-existing illness or infirmity (unless notified to and cover agreed by the insurer); and
• accidents while participating in motor cycling, racing of any kind (except on foot), winter
sports and mountaineering, although some of these can be ‘bought back’ by payment of
an additional premium.
Question 5.2
Using what you’ve learnt about franchises, what is the effect of the seven-day
franchise commonly found with sickness cover?
B3 Medical expenses
This insurance provides cover for hospitalisation and treatment resulting from sickness
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or injury.
Typical in-patient cover includes:
• hospital charges incurred in surgery, theatre fees, consultations, nursing and
aftercare costs;
• specialists’ fees such as specialist consultations and surgeons’ fees; and
• additional costs such as ambulance fees.
Medical expenses cover is usually based on the level of benefits selected, and premiums
tend to increase with the age of the policyholder.
Exclusions include:
• long-term residential care; and
• pre-existing conditions (where treatment has been administered within five years prior to
the date of cover commencing).
C Household insurance
Insurance for private houses and their contents is almost always provided by houseowners’
or householders’ comprehensive policies. These often combine protection for the house and
its contents, and cover damage from fire and a large number of other perils.
There is no such thing as a ‘standard’ household insurance policy, both cover and wordings
vary. Here, we will look briefly at buildings and contents insurance.
C1 Buildings insurance
This includes not only the main structure but may also cover garages, sheds, greenhouses,
outbuildings, swimming pools, tennis courts, garden paths. Anything you would normally
leave behind on moving from the house is part of the building, e.g. air conditioning, fitted
kitchens etc.
The cover generally available is as follows:
• Fire, lightning, explosion and earthquake.
• Riot, civil commotion, strikes, labour or political disturbances, malicious damage
or vandalism. Cover usually excludes loss or damage if the building is unoccupied for
more than 30 or 60 days. Malicious damage is usually subject to an excess.
• Storm, cyclone, typhoon, tempest, hurricane, tornado, flood and inundation loss.
• Falling trees or branches. Walls, gates, fences or hedges will be excluded.
• Escape of water. This covers the bursting (for example, as a result of freezing) or
overflowing of water tanks, apparatus or pipes, and includes any fixed domestic
equipment. Cover excludes damage while the building is unfurnished or unoccupied for
more than a certain period (30 or 60 days) and an excess is sometimes imposed,
although this may be removed subject to an additional premium.
• Escape of oil. Damage caused by escape of oil from any fixed oil-fired heating system is
covered and an unfurnished/unoccupied exclusion applies (30 or 60 days).
• Theft or attempted theft. Cover is usually excluded while the premises are left
unfurnished or unoccupied for more than 30 or 60 days. Theft or robbery is excluded
under standard property insurance in China, where theft or robbery coverage is an
extension clause/endorsement.
• Impact. Cover is in respect of impact or collision with aircraft or other aerial devices, or
articles dropped from them, road vehicles, or animals. There may be an excess imposed
for the insured's or their family's vehicles or animals. Damage caused by pets is usually
excluded.
• Subsidence, ground heave or landslip. Various exclusions will apply together with a
large excess.
• Breakage or collapse of television or radio receiving aerials, aerial fittings and
masts. This covers damage to the building caused by the collapse of the aerials, but not
damage to the aerial itself which is usually covered under the contents section.
• Accidental damage to drains, pipes, cables or underground pipes. Covers accidental
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damage to water, oil, gas, sewage and drain pipes, underground telephone, television
and electricity cables serving the building.
• Accidental breakage of glass and sanitary fixtures. Covers accidental breakage of
fixed glass in windows, doors, fanlights and skylights or greenhouses, conservatories and
verandas forming part of the building. It also covers accidental breakage of fixed wash
basins, cisterns, baths and other sanitary fittings. The unfurnished/unoccupied exclusion
applies.
• Legal fees, architects’ and surveyors’ fees, cost of debris removal. Covers
reasonable legal fees and architects’ and surveyors’ fees necessarily incurred in the
reinstatement of the building following loss or damage. The costs of demolition or shoring
up the building and debris removal are also covered. Cover excludes any costs involved
in preparing the insured’s claim.
• Loss of rent. This provides cover in respect of loss of rent for any part of the premises
not occupied by the insured which has become uninhabitable. There will be a time limit. It
also covers the reasonable cost of alternative but similar accommodation while the
premises are uninhabitable as a result of an insured peril. A limit of the buildings sum
insured will apply.
• Accidental damage. Usually as an optional extension.
C2 Contents insurance
This generally means insurance for household goods and personal effects of every
description, belonging to the insured or a family member living in the property. It includes
cash and stamps (not part of a collection) up to a set amount, and any fixtures and fittings
belonging to the insured.
The risks covered are essentially the same as for the buildings cover but with the following
differences:
• theft, or attempted theft, of cash, currency, bank notes and stamps may be excluded; if it
does not involve forcible and violent entry or exit;
• theft, or attempted theft, while the building is lent, let or sub-let in whole or in part may be
excluded if it does not involve forcible and violent entry or exit;
• accidental damage cover, certain contents are excluded, e.g. clothing, money and
stamps, plants.
There are usually limits on single articles of value (e.g. 5% of total sum insured) and a
valuable limit (e.g. one-third of total sum insured). Valuable items, usually those in excess of
a set figure, are generally specified under the policy.
The following extensions to cover are usually included automatically:

• Temporary removal. The policy is automatically extended to cover the contents while
temporarily removed but remaining within territorial limits. However, the risk of storm and
flood as regards property in transit or on the person is excluded. Theft is only covered:
• – at any bank, safe deposit or occupied private dwelling;
– in any building where the insured or a family member is residing, or is employed or
carries out business;
– in the course of removal to or from any bank or safe deposit while in the insured's or
their family's charge.
• Clothing and personal goods of domestic servants. Cash, currency, bank notes and
stamps are excluded.
• Accidental breakage of mirrors and glass or furniture.
• Loss of rent. Cover is extended to include loss of rent and reasonable additional
expenses incurred for alternative accommodation in the event of the premises becoming
uninhabitable. Cover is usually limited to, say, 10%–20% of the contents sum insured.
Question 5.3
Why would certain risks (theft, malicious damage, escape of water/oil) be excluded if
the property is left unoccupied?
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Other extensions can be included for additional premium, for example:

• accidental damage to entertainment equipment;
• accidental damage while in the course of removal; and
• cost of replacing door locks after theft of keys.
Typical exclusions may be as follows:
• property more specifically insured elsewhere;
• medals and coins, unless specifically insured;
• motor vehicles; and
• livestock (other than horses).
All household policies also cover legal liability for accidental injury or accidental damage to
material property, usually with a limit per claim as part of the basic cover:
• Buildings: liability on owner and liability incurred for faults in property formerly owned or
occupied by the insured.
• Contents: liability incurred by the insured as occupier of the property, and at other
premises used for temporary accommodation. There will also be personal liability cover
here for an insured while away from their premises.
Consider this…
What extensions in cover do you think can be added to a household policy?
C3 Optional extensions
The most common extensions apart from those already discussed in relation to the specific
sections of buildings and contents are as follows.
C3A ‘All risks’
‘All risks’ cover is available for personal possessions regularly taken out of the property.
Usually such cover is only available in conjunction with contents cover. Most insurers include
a separate sum insured for unspecified and specified items.
Unspecified items
This covers items while away from the insured address. The definition of unspecified items
may be very wide (for example, covering clothing, personal effects and valuables) or may be
more restrictive (for example, some insurers may require a separate item for clothing).
Certain types of property are not insurable under this extension as:
• individual terms may need to be applied (for example, contact lenses);
• separate insurance is available (for example, motor vehicle);
• insurers are not prepared to provide automatic cover (for example, documents).
The single article limit can vary from, say, between US$100 and US$1,000.
Specified items
Specified items are those which exceed the unspecified single article limit or those to which
special terms apply. Examples are jewellery, furs and photographic equipment. The sum
insured should represent the replacement value.
Specific exclusions are:
• wear and tear etc.;
• insects or vermin;
• corrosion, rot, mildew, fungus or atmospheric conditions;
• any process of heating, dyeing, alteration or repair;
• scratching, denting, breakdown, faulty workmanship/materials; and
• deeds, bonds and documents.
C3B Money and credit cards
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The money extension provides a form of ‘all risks’ cover much wider than that included under
the contents section. Cover relates to accidental loss of money. ‘Money’ usually covers cash,
cheques, bankers’ drafts and postage stamps/certificates, premium bonds, lunch vouchers,
gift tokens and travel tickets. A limit of indemnity and an excess usually apply.
There may also be specific exclusions such as:
• shortages due to error/omission; and
• losses not reported to the police within 24 hours.
The credit card extension provides cover in respect of financial loss following loss or theft of
a card and its subsequent misuse. Credit cards usually also include debit and cash cards.
Specific exclusions apply, including:
• unauthorised use of the credit card by one of the insured’s household; and
• breach of the issuer’s terms and conditions.
C3C Bicycles
Cover is for pedal cycles and accessories on an ‘all risks’ basis. There may be a separate
sum insured per cycle or, more usually, a limit per cycle owned by the insured or family
members and an excess.
Specific exclusions are as follows:
• loss or damage to parts or accessories;
• use for racing or trials; and
• theft while unattended, unless secured.
C3D Personal accident, hospital cash benefit and creditor insurance
Cover is available against the risk of personal accident and/or sickness, redundancy or
unemployment for the insured and their family. Cover is also available against the inability to
continue credit instalment payments in the event of redundancy or unemployment (limited to,
say, 24 months, excluding the first month of any period).
C3E Domestic animals/pets

Cover is available for horses, ponies, domestic cats and dogs.
• Horses and ponies. Cover includes death from accident, sickness or disease, economic
slaughter and loss by theft or straying. Cover may also include temporary incapacity,
veterinary fees, saddles, bridles or other riding tack, third party liability, personal accident
to the rider and accidental damage to the horsebox trailer.
• Cats and dogs. Cover includes veterinary fees, accidental death, death from illness, loss
by theft, kennel fees while the owner is hospitalised, advertising and reward, third party
liability and holiday cancellation following emergency surgery to the pet.
C3F Legal expenses
The legal expenses extension provides cover for the following:
• Recovery costs: for legal action taken to enforce the legal rights of the insured against
third parties.
• Civil defence costs: for the defence of certain types of civil claims not covered by other
forms of insurance.
• Prosecution defence costs: for the defence of certain criminal charges which may arise
from unintentional acts of the insured.
• Employment dispute costs.
Specific exclusions are as follows:
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• claims relating to events occurring outside the specified territorial/geographical limits;

• appeals;
• costs and expenses not agreed by the insurer; and
• claims arising out of the insured’s business, deliberate or criminal act or omission, libel
and slander, divorce or matrimonial matters and disputes between landlord and tenant.
It is important here to distinguish between legal expenses as a section of cover offered under
most household insurance policies, and add-ons which are often cross-sold to customers
when obtaining cover for other classes of insurance (e.g. private motor).
D Travel insurance
Many people may require cover for personal accident, sickness and other related expenses
during specific periods, sometimes when they are particularly at risk. A good example of this
is when people are travelling. Insurers, therefore, often provide policies to compensate for
these losses and specialist travel insurance policies have developed.
Consider this…
What risks can you think of that are associated with travelling?
Most travel policies cover the following:

• personal accident benefit for death, loss of eyes/limbs, or permanent total disablement;
hazardous activities are excluded but can be included at an additional premium;
• medical and associated expenses subject to a given maximum limit;
• loss of deposits, i.e. if the holiday is cancelled for unavoidable reasons;
• baggage, personal effects and money;
• personal liability;
• delayed baggage;
• hospital cash benefits;
• travel interruption; and
• travel delay.
In addition to the ‘standard’ cover, the following optional extensions may be available:
• lack of services or amenities;
• loss of passport;
• hijack; and
• legal expenses.
There are general exclusions, such as pregnancy and childbirth, physical or mental disability,
suicide, confiscated luggage and damage to fragile objects.
E Extended warranties
This insurance applies to buyers of mechanical and electrical goods. Normally, when you
buy something like a new car or television, it comes with a warranty. This is a guarantee that
provides for free repairs if the item needs repairing within a set period of time. The insurance
extends this period.
Example 5.2
When you purchase a new washing machine it is likely that the manufacturer will provide a
guarantee (or warranty), which will usually last for twelve months. You will probably be
offered an extended warranty policy at the time of purchase to extend this period for two,
three or even five years.
Chapter 5
These policies, issued by insurers and some large authorised retailers, cover free repairs
following electrical and mechanical defects. Policies are also available to cover all of an
insured’s electrical products. There is usually a condition that the repairs must be carried out
by the supplier.
The following exclusions apply to an extended warranty policy:
• negligent handling and/or failure to comply with manufacturers’ instructions;
• risks normally covered by a household contents policy;
• war; and
• the cost of repairs to items such as bulbs, aerials, external wires, knobs, handles and
driving belts.
Key points
Motor insurance
• Motor insurance is compulsory in many parts of the world. It is can be the vehicle or a
named driver that is insured – this depends on the country concerned.
• There are two different levels of cover available:
– third party only; and
– comprehensive.
• Comprehensive or fully comprehensive is the widest possible protection and includes
other accidental and malicious damage to the insured vehicle.
• The commercial vehicles class of business is a type of commercial, rather than
personal, insurance and includes:
– goods-carrying vehicles;
– carriage of passengers for hire and reward;
– passenger-carrying vehicles;
– agricultural and forestry vehicles;
– vehicles of special construction or ‘special types’.
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• The same levels of cover are available for private motor cycle insurance as for car
insurance except there is no cover for theft of accessories or spare parts unless the
motor cycle is also stolen.
• The cover provided does not include damage to goods carried in the vehicle as this is
covered by a goods in transit policy.
• The range of cover is the same as in private motor insurance with variations in respect
of the exclusion of certain benefits such as personal accident and personal
effects cover.
Health insurance
• Health insurance can be broken down as follows:

– Personal accident which provides payments in the event of accidental death or
bodily injury.
– Sickness which provides payment for persons unable to perform any part of their
job due to illness.
– Medical expenses which provide cover for individuals requiring medical treatment
and/or hospitalisation.
• A personal accident and sickness policy is a benefit policy and the benefit is a lump
sum payable (capital benefit).
• Illness or sickness cover is usually offered as an extension to the personal accident
policy and provides weekly benefits.
• Medical expenses cover is usually based on the level of benefits selected, and
premiums tend to increase with the age of the policyholder.
Household insurance
• Household insurance for private houses and their contents covers damage from fire
and a large number of other perils.
• In addition to the main structure, buildings insurance includes garages, sheds,
greenhouses, outbuildings, swimming pools, tennis courts and garden paths.
• Contents insurance generally means household goods and personal effects of every
description, belonging to the insured or a family member living in the property.
• All household policies also cover legal liability for accidental injury or accidental
damage to material property.
Key points
• There are several optional extensions available ranging from all risks cover for
personal possessions regularly taken outside the property to pedal cycles and pets.
Travel insurance
• Most travel policies provide a schedule of benefits ranging from personal accident and
medical expenses to delayed baggage and travel delays. There are general
exclusions, such as pregnancy and childbirth, physical or mental disability, suicide,
confiscated luggage, damage to fragile objects.
Extended warranties
• Extended warranty insurance extends the period of guarantee that comes with the
purchase of mechanical and electrical goods. The policy cover provides for free repairs
following electrical and mechanical defects. There is usually a condition that the repairs
must be carried out by the supplier.
Chapter 5
Question answers
5.1 An indemnity policy places an insured in the same financial position after a loss as
they were in before it, i.e. a measurable financial loss must have occurred. A benefit
policy pays a pre-defined benefit whether or not a financial loss occurred.
5.2 With a seven-day franchise, if an insured is sick for under seven days, nothing
would be payable under the policy, while once the seven days is exceeded, the
claim would be paid in full, including the initial seven days.
5.3 Because these risks increase to a significant extent when premises are left
unoccupied. Empty premises are often more prone to break-ins as they are an
easier target, and damage caused by escaping water could become more severe
as it would be undiscovered for a longer period. For this reason, insurers exclude it,
though arrangements can sometimes be made to ‘buy back’ the cover, usually
subject to some restriction.
Chapter 5
Self-test questions
1. What is the minimum motor insurance cover available? What is the scope of this
cover?
2. What exclusions apply to a comprehensive motor policy?
3. Under a motor cycle policy, when will there be cover for the theft of accessories or
spare parts?
4. Why is a personal accident and sickness policy called a benefit policy?
5. What basic cover is provided by private medical insurance?
6. How are 'buildings' defined in a typical household policy?
7. What optional extensions are usually available under a travel policy?
8. What standard policy cover is offered by an extended warranty insurance?

Chapter 5
Insurance products:
6
commercial insurances
outcomes
Introduction
A Property insurance 6.1, 8.2
B Pecuniary insurance 6.1, 8.3
C Liability insurance 6.1, 8.4
D Cyber insurance 6.1
Key points
Question answers
Self-test questions
Chapter 6
Learning objectives
• describe the basic features and typical policy cover of the insurance types detailed; and
• explain the underwriting approach and considerations for various classes of insurance.
Introduction
This chapter considers the kinds of insurances that a business would take out.
Key terms
‘All risks’ insurance Liability insurance Material damage Pecuniary insurance

proviso
Pollution liability Product liability Professional Property insurance
insurance indemnity insurance
Public liability Special perils Standard exclusions Theft insurance
insurance
A Property insurance
A1 Fire and special perils insurance
Fire insurance developed alongside the need for businesses to insure their assets. Fire
policies tend to be standard across the territory concerned. Individual insurers issue their
own versions to include 'extra' perils (also known as special perils or 'specified
contingencies').
So, what is ‘standard’ fire cover? Standard fire cover is often made up of three parts:
• fire (excluding explosion resulting from fire, earthquake or subterranean fire, and its own
spontaneous fermentation or heating);
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• lightning; and
• explosion (restricted to explosion of boilers or gas used for domestic purposes only).
The ‘special perils’ may be added individually or in combinations. For example:
• Explosion. Namely those emanating from chemical reactions, producing suddenly
expanding gases. Exclusions apply where damage is caused by the bursting of a boiler or
other equipment that belongs to or is under the control of the policyholder where the
internal pressure is due to steam only (these are items insurable under an engineering
explosion policy).
• Aircraft (excluding sonic bang), i.e. an aircraft or aircraft parts falling through the roof of a
building.
• Malicious damage, i.e. vandalism.
• Earthquake. This is often classed as a fundamental risk in countries prone to
earthquakes.
• Subterranean fire – otherwise known as underground fire. Particularly important if you live
in an area with former mining activity.
• Spontaneous fermentation or heating.
• Storm and flood. These two perils are usually written together as quite often storm is the
proximate cause of flood. An insurer is unlikely to offer flood insurance in isolation and
terms are applied to both perils to avoid ambiguity when settling claims. Property which is
vulnerable to such losses is usually excluded, e.g. gates and fences, as are changes in
the water table level.
• Escape of water/leakage. Some policies may also make reference to escape of oil.
• Impact damage (including own vehicles).
• Sprinkler leakage – offered to companies with sprinkler fire protection in their premises,
provided the systems are maintained.
• Subsidence, ground heave and landslip (with special exclusions).
Chapter 6 Insurance products: commercial insurances 6/3
A1A Standard exclusions

Certain causes of damage are excluded. Some because they are regarded as fundamental
risks (war, riot, radiation, pollution), and others because they are more properly insured
under other types of commercial insurance policy (e.g. marine, consequential losses).
The main standard exclusions are:
• War risks.
• Radioactive contamination/explosive nuclear assemblies.
• Terrorism as defined in relevant legislation.
• Pollution or contamination unless caused by an insured peril or causing an insured peril
to occur.
• Marine policies.
• ‘More specifically insured’ clauses. For example, a motor vehicle left in a building
overnight that is lost to fire would usually be covered in its own right under a private motor
policy. Other examples include anything lost in cold storage facilities due to a change in
temperature, and particularly valuable contents such as money, works of art and
jewellery, unless specifically mentioned in the policy.
• Claims for damage to electrical items/machines from over-running or short circuiting.
• Earthquake, tsunami and volcanic eruption. In regions which suffer significant earthquake
damage, cover may be available as a separately related peril. Tsunami is often covered
by an extension.
• 'Consequential loss'. For example, loss of profits or income following and consequent
upon a loss proximately caused by an insured peril.
• Sonic bangs.
• 'e-risk' which excludes damage resulting from cyber related risks such as computer
viruses etc.
Chapter 6
A2 ‘All risks’ insurance
The name ‘all risks’ insurance is slightly misleading as it does not cover everything, it simply
covers everything that is not specifically excluded.
It is acknowledged that uncertainty of loss is not limited to events brought about by fire and
special perils or to events occurring on or around the insured’s premises. For large risks the
insurer may add ‘all risks’ cover to a basic fire policy with some exclusions restricted to only
the extra ‘accidental damage’ cover, leaving the named perils intact.
In essence, all loss or destruction of, or damage to, the property insured is recoverable as
long as it has occurred accidentally in respect of the insured, and the cause is not
specifically excluded. There are no optional extensions, everything is covered, unless
specifically excluded.
Exclusions can be divided into four groups:
• absolute exclusions such as war, pollution, contamination, consequential loss etc.;
• gradually operating exclusions such as corrosion/rust, wind/rain damage to property in
the open;
• aspects of cover which can be written into the policy, e.g. money, glass, subsidence; and
• property or risks more appropriate to another class of business such as motor vehicles
and aircraft.
A3 Theft insurance
While damage to property caused by fire was one of the earliest obvious causes of loss,
other people stealing it, or damaging property while trying to steal it, followed close behind,
so theft insurance developed in response to this need.
As you know, the general meaning of theft refers to taking something that belongs to
someone else, without their consent, and with no intention of returning it. In insurance,
however, theft has a specific meaning. In some countries it must involve forced entry or a
break-in to be considered theft.
Common extensions to theft policies could include:

• breakage of glass (if not insured specifically elsewhere);
• replacement of locks, if the keys are lost/misplaced etc. – insurers would rather pay for an
insured to replace the locks in the building than a large theft claim;
• temporary removal – covers theft damage while possessions are being cleaned, restored,
repaired etc. while temporarily away from the premises;
• index-linking (with premium adjustment at the end of the policy period); and
• extended or full theft, i.e. the ‘forcible and violent entry’ phrase is deleted – this is often
requested when items of plant or stock are kept in the open overnight.
Be aware
There is no stand-alone theft insurance in China. Theft cover is usually provided by
extension under property insurance.
Question 6.1
Can you think of a commercial risk that would require full theft cover while kept in
the open?
Common exclusions could include:

• collusion, e.g. plotting and agreement between the thief and employee(s): this can be
included, subject to underwriting and additional premium;
• fire and explosion;
• cash, bank notes etc. (this should be covered under a money policy); and
• livestock.
Chapter 6
Cover for smaller risks is usually subject to compliance with an intruder alarm warranty and a
minimum standard of security warranty.
Theft cover is usually priced using the theft estimated maximum loss (EML) as a rating
factor, as more often than not a 100% loss is not expected. An EML is the amount (often
expressed as a percentage of the sum insured) which is considered by the insurer to be an
accurate reflection of the worst financial effect that the maximum foreseeable loss
would have.
Consider this…
Why is the EML usually less than the sum insured in respect of theft?
Think about a large warehouse storing television and electrical equipment, all with a high
value. In practice, it would be difficult, if not impossible, to steal everything so thieves
would be selective in what they take. It would be very unlikely that all the contents would
be lost at one time.
You should note that underwriters generally apply different levels of rating for the type of
goods at risk. For instance, thieves are fairly unlikely to steal office desks, paper, cleaning
equipment and other general contents, especially if more attractive targets (computers, wine,
electrical stock, jewellery) are present. Underwriters would, therefore, tend to cover general
contents at a reduced rate compared to more valuable items.
A4 Glass insurance
Glass would usually be insured against damage caused by a fire or theft if a fire or theft
policy were in place. However, some common causes of damage to glass (accidental
damage) are excluded from these standard covers, so a business with large amounts of
glass will often want cover for this. An example would be a high street shop as large plate
glass windows can be extremely expensive.
A standard policy covers destruction or damage to all fixed glass, including windows, doors,
fanlights, showcases, mirrored glass and glazed partitions, and usually includes an
extension to provide for the cost of boarding up damaged glass until replacement can be
provided.
Cover is ‘all risks’ but scratching or chipping is usually excluded. It may be extended, for
additional premium, to include damage to storefront contents because of broken glazing, and
damage to washbasins and sanitary fittings in hairdressing salons.
Damage by fire, lightning and explosion is generally excluded (these perils are covered
under a standard fire policy). Excesses are standard.
Be aware
There is no stand-alone glass insurance in China. Cover would be offered as an extension
to named perils property insurance or covered automatically under ‘all risks’ property
insurance.
A5 Money
Businesses, especially shops, often have large amounts of cash on the premises. Clearly
there is a risk to this money, both while in the shop and in transit. As a result, many
businesses take out special insurance to protect against loss of money.
Money generally includes cash, bank drafts, cheques, postal orders, currency notes,
vouchers and postage stamps.
In their policy wordings insurers refer to the ease with which items such as uncrossed
cheques, gift or lunch vouchers, and money orders can be converted to cash. This is known
as negotiability. Items that are difficult to convert are considered non-negotiable.
Question 6.2
Chapter 6
Can you think of items which are non-negotiable?
The following limits for negotiable items will generally be specified in the policy schedule:
• Any other money limit. This is the limit to money while in the premises when open for
business and while in transit. In respect of money in transit insurers may stipulate an
‘escort warranty’ where, depending upon the amount of money being carried, a specified
number of able-bodied people may need to be present.
• Money in a safe. Insurers will often require a safe to be installed if the ‘money’ at risk
exceeds certain limits. Safes are manufactured and tested to achieve a cash rating, i.e.
an amount for which the safe is suitable. It is often the job of the risk surveyor to
determine whether a safe is required or assess whether an existing safe is suitable.
• In the insured’s premises out of working hours. Up to a set amount.
• The private residence of a director or employee. Up to a set amount.
• A policy covers risks of loss or damage to or destruction of money on an all risks basis,
and includes damage to safes or strong rooms caused by theft or attempted theft.
It can be extended to include:
• personal accident/assault; and
• credit cards (which are not covered by a standard money policy).
The main exclusions are losses due to:
• error or omissions in accounting and book-keeping;
• dishonesty of an employee, not discovered within seven days;
• damage arising outside a territorial limit; and
• a safe/strong room opened by a key left on the premises while closed for business.
B Pecuniary insurance
So far we have dealt with losses that affect business by causing loss or damage to property
belonging to the policyholder. When running a business there are other financial losses that
can be insured against. Because the loss here involves direct financial loss it is known as
pecuniary insurance. In risk management terms, failure to obtain pecuniary insurance is
considered to be a significant risk in some markets.
Consider this…
Raj owns a factory that makes electronic goods. He has a fire and theft policy covering the
contents (machinery, stock, computers) of his factory. One night there is a serious fire.
Can you think what other losses Raj might incur?
In the event of serious damage Raj would be insured for the replacement costs of the
contents. However, as his workforce would still turn up for work the next day he would be
obliged to pay them for a certain period, even though they couldn’t work. He may have loans
from the bank and would have to continue to pay interest. There may be a range of other
financial obligations that he has to meet, even though he cannot produce any more goods so
is not selling anything and therefore losing income. This is the function of business
interruption insurance (also sometimes known as consequential loss or loss of profits
insurance).
B1 Business interruption insurance

This covers the actual or potential loss of earnings and additional expenses incurred as a
result of a material loss covered under property insurance.
Consider this…
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Why would business interruption insurance be required?
It is important to note that property insurance only covers material loss following damage or
destruction but:
• earnings may reduce or cease following property damage;
• certain overheads will still need to be paid at their full level; and
• there may be increases in costs incurred in order to keep the business operating.
These are covered by business interruption insurance, as well as accountants’ charges
incurred in presenting the claim.
In assessing the need for business interruption insurance it is necessary to estimate the
maximum time the income of the business could be affected as a result of damage caused
by, for example, fire. This period is known as the ‘indemnity period’.
A maximum indemnity period is then chosen by the insured (this could be 12 months or even
36 months). It is important that due consideration is given to this period, as it is not always
obvious how a business could be affected as a result of a fire. The maximum indemnity
period is the longest period over which the business interruption cover will support the
business.
For example, take Raj’s factory. Although it may be possible to replace the machinery in a
relatively short space of time (assuming there is not a long waiting list) and get back to
making products fairly quickly, what happens if Raj’s main customer can’t wait for him to get
back in business and starts ordering from an alternative supplier? It may take Raj time and
marketing to get that customer back. All this is a loss of income directly related to the fire, but
it would only be insured if the indemnity period were sufficient to include that period of loss.
Cover will begin with the occurrence and end not later than the maximum indemnity period
chosen. Cover is obviously restricted to the time the business was affected.
The main items insured under a business interruption policy are:

• loss of profit; and
• increased cost of working incurred in order to reduce the loss of profit following the
insured event. Such costs should be economic and lower than the amount of profit saved.
Savings made during the indemnity period will be deducted.
There will usually be a material damage proviso, requiring a property policy covering the
physical damage for the incident, before the business interruption policy comes into
operation. In practice, the two policies will usually be linked.
Consider this…
Why do you think insurers would insist on a material damage proviso?
Unless there is an insurance policy in force covering damage to the property there is a good
possibility that the damage would not be repaired quickly and the interruption to the business
would be longer. So, any claim under the BI policy would be likely to be much higher.
The most common policies are business interruption arising from:
• Fire and special perils: the standard perils are extended to include non-domestic boilers.
The special perils also contain six engineering special perils not covered by the material
damage policy (although the material risk will need to be covered by an engineering
policy because of the material damage warranty).
• ‘All risks’: insurers often issue a combined material damage and business interruption
policy. As in property insurance this is not all risks, it covers any risk that is not specifically
excluded.
• Engineering: the perils covered are usually either:
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– failure of public utilities supply; or
– sudden and unforeseen damage from any accidental cause not specifically excluded.
B1A Optional extensions
There are certain optional extensions. The cover will be the same, or sometimes a lesser
range of perils, as at the insured premises. For example:
• Specified suppliers. Provides an indemnity to the insured if the supplier suffers a
serious loss and cannot supply the insured’s goods. Clearly, the insured will be unable to
produce the finished item if the raw material is unavailable. This can expose the insurer to
potentially heavy losses especially when the item supplied is specialist in its nature with
no readily available alternative market. Insurers often require surveys of the supplier’s
premises if the exposure is particularly large. This can be difficult if the supplier is located
in a different country.
• Unspecified suppliers. As above but most business interruption wordings include a
pre-set limit, e.g. 10% of the gross profit sum insured, for loss of profit as a result of a loss
at a supplier’s premises which negatively affects the insured’s profits.
• Specified customers. Similar to above except the loss has to occur at a customer’s
premises, preventing them purchasing the insured’s goods.
• Prevention of access. Customers being unable to access the insured’s premises
following damage to other premises within in the local area which could lead to loss of
profits for the insured.
• Public utilities. Failure of gas, electricity or water to the insured’s premises affecting
production and subsequent profit.
• Contract sites. An insured may incur a loss if there is damage on a contract site where
they are working.
B1B Increased cost of working (ICOW)

It is at this point that we need to address increased cost of working, also known as additional
cost of working.
Some companies would not necessarily suffer large scale, if any, loss of profits if they
suffered a serious fire or other loss at their premises. Increased cost of working has been
designed to provide those type of companies with an amount of money to spend on getting
the business going again as quickly as possible.
Example 6.1
If fire were to destroy an accountant’s office, the firm would no doubt lose its furniture,
computer systems, stationery and other items. The insurer would appoint a loss adjuster
whose function is to settle the claim on the insurer’s behalf as quickly and economically as
possible.
So how would the loss adjuster tackle this task? First, the company would need a new
office and the loss adjuster would try to find one. Provided the accountancy firm owns its
building or is responsible for insuring it, the property insurance would reinstate the building
(i.e. restore it to the state it was in before the fire), although this could take time.
Second, the loss adjuster would hire computers and office equipment for the temporary
accommodation. The insured might decide to tell customers about the move by
advertising or holding an event at their new premises. The firm could be up and running
again very quickly and would not have incurred a substantial loss of profits. The increased
cost of working cover would provide for the costs of hiring alternative premises, office
equipment and informing clients of the move.
A second scenario might involve a company that transports goods. A fire at its warehouse
would destroy stock and any offices but the trucks, which earn the profits, would probably
be out on the road or in the yard. The loss adjuster would simply need to hire a temporary
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office and warehouse to hold stock during the reconstruction. The profits would not be
unduly affected and the increased cost of working would be an appropriate form of
interruption cover.
A limited form of increased cost of working cover is provided under standard business
interruption policies. Insurers are happy to pick up additional costs should the costs incurred
reduce the size of the overall profits claim.
A good example would be a bakery which supplies bread to supermarkets. Following a fire, it
would be in the insurer’s financial interest to sub-contract the baking and packaging of bread
to other bakeries, until the building refurbishment is complete, rather than cover the insured’s
loss of profits. After all, should the insured lose the supermarket contract, the claim could run
into millions.
The main difference between an increased cost of working extension under a loss of profits
(business interruption) policy and a stand-alone increased cost of working policy is that a
stand-alone policy covers uneconomic losses, i.e. the insured can allocate the money as
they wish (within the terms of the policy of course), whereas under standard profits cover, the
additional costs need to be economic, i.e. serve to reduce the size of the profits claim.
B2 Legal expenses insurance

These policies cover companies’ costs arising out of the need to take action in the courts to
defend an action brought against them. They also cover the cost of the insured’s and their
employees’ time spent in court. A standard policy consists of some of the following:
• employment disputes;
• criminal prosecution defence cover;
• property disputes cover;
• motor cover;
• patents, registered designs, copyright and trademarks cover; and
• taxation proceedings.
C Liability insurance
In law we all owe a duty to each other to ensure that our actions do not injure others or
damage their property. This is known as the ‘duty of care’.
In the event of a breach of this duty, a party can be liable to pay damages (compensation) to
another who suffers loss or damage arising from negligence (lack of care). The most
common example of this would be in a motor accident, where the person who is at fault is
liable to pay for the repair to the other’s car (usually paid for by insurers). Even if found not
liable, a party may be liable for costs or expenses in taking legal action or advice. Covering
such costs is the purpose of liability insurance.
It is worth spending a little time on the concept of negligence, as this drives liability and
liability insurance. Without someone being in some way negligent there is not usually a legal
liability to pay for injury or damage. In general terms negligence can be defined as:
Doing something which the reasonable or prudent person would not do, or omitting
to do something which a reasonable person guided by those considerations which
ordinarily regulate the conduct of human affairs, would do.
If negligence occurs and someone is injured, there may be a liability to pay damages to that
person. Liability insurance provides cover for this possibility.
C1 Employers’ liability/workmen’s compensation insurance

Employers’ liability or workmen’s compensation insurance provides legal liability cover for
compensation to employees for bodily injury or death caused by accidents or diseases
arising from and in the course of employment.
Example 6.2
China has Work-related Injury Insurance which is managed by its social security
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department. The premium is paid by employers and the rate based on the risk of injury in
different sectors. China also has compulsory liability insurance for certain hazardous
industries. It covers the insured's liability for injury of an employee or third party during
production and storage activities at locations specified in the policy.
India’s workmen’s compensation was renamed employers’ liability in 2010 when its 1923
Workmen’s Compensation Act was amended. The amendments mean cover is no longer
restricted to workmen.
In parts of the Middle East, while the Regulations focus on workmen’s compensation,
insurers offer a combined workmen’s compensation and employers’ liability policy. This
meets the Regulations and extends a limit of liability for employers. Although the concept
of negligence operates in the Region’s courts, they tend to protect the least financially
powerful party.
Question 6.3
Take Raj's factory. He employs a number of people to operate the machines. Do you
think he is liable to pay any damages in the following situations. How do you think his
employers' liability/workmen's compensation policy would respond?
a. Anuj drops a cup of tea on his foot and breaks his toe.
b. Sushma gets her hand caught in the machine and breaks five fingers. The guard
had been taken off the machine.
c. Pankaj injures his back playing football in the yard outside the factory after work.
d. A customer hurts herself after tripping on a loose carpet.
e. Mahesh is off work for a week after he is hurt when another employee pulls his
chair from under him, as a joke, as he is about to sit down.
C2 Public liability insurance

Public liability insurance is 'open' in that it covers all legal liability that is not excluded. It
provides an indemnity to the insured for legal liability to third parties for damages (including
claimants' costs and expenses) related to bodily injury, death, disease or illness, and for any
loss of or damage to property which happens in connection with the business insured under
the policy and occurring during the period of insurance.
Again, the critical point here is that there has to be legal liability, so there must be negligence
(or breach of legal duty) for there to be a valid claim against the policy.
Question 6.4
Can you think of three examples where a claim could arise under a public liability
insurance policy?
Mention should be made here of the:

• accident: i.e. the cause cannot be either a deliberate act or omission of the insured;
• injury to persons: i.e. there must be some form of physical or medical impairment;
• loss of or damage to property: there must be physical damage to material property
(including loss or disappearance) though this excludes intangibles (e.g. copyrights) or
indirect economic loss;
• consequential loss: e.g. for damage to a vehicle, the insured may be liable for the cost
of a hire car while the third party’s vehicle is being repaired – this would be covered; and
• limit of indemnity: usually, a limit per occurrence.
A number of exclusions apply such as:
• injury to employees (this would be covered under an employers’ liability/workmen’s
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compensation policy);
• property belonging to the insured (covered under a property policy);
• product liability, i.e. liability arising following the sale or supply of a product;
• contractual liability, i.e. agreements that the insured makes with third parties which are
over and above the legal interpretation of ‘legally liable’;
• cost of rectifying defective work (insurers would not want to cover the cost of remedying
poor workmanship. Any injury or damage to third parties incurred as a result of such
workmanship would of course be covered);
• professional negligence;
• deliberate acts, i.e. not ‘accidents’;
• motor vehicles;
• vessels and craft;
• lifts, elevators and boilers (covered by engineering policies);
• war risks; and
• radioactive contamination.
Example 6.3
Suhail wants to construct a new swimming pool at his home. He contracts Ahmed to
undertake the work. The contract between Suhail and Ahmed specifies that Ahmed is
responsible for any liability arising from Suhail’s property if it is directly or indirectly related
to Ahmed’s work in building the new pool. This is contractual liability because the law
usually looks only at losses caused by Ahmed but the contract specifies a wider than
usual wording to protect Suhail. Ahmed could seek an extension to his public liability
policy to buy back the exclusion of contractual liability for the purpose of this particular
contract.
C3 Product liability insurance

The standard product liability policy covers legal liability for bodily injury or property damage
which arises out of goods or products manufactured, constructed, altered, repaired, serviced,
treated, sold, supplied or distributed by the insured. Cover is not usually offered separately
from the basic public liability policy. It is often sold in conjunction with the public liability policy
as a combined public liability/product cover.
Examples of product liability situations would be as follows:
• injury caused by faulty wiring on an electric item;
• injury caused by use of weak glass in a jar, causing it to smash too easily;
• damage to a car due to a faulty brake part causing it to roll away while parked; and
• food poisoning caused by incorrectly processed food.
The points to remember about product liability insurance are:
• Cover is for consequential loss following actual injury or damage.
• Financial loss is not usually covered unless accompanied by bodily injury or loss of or
damage to property.
• The basic cover is dependent on an element of accident.
• The injury or damage must occur during the period of insurance.
• A yearly aggregate limit of indemnity is usually specified.
You would expect to find the following exclusions in a product liability policy:
• Contractual liability.
• Damage to the actual good(s) supplied. Insurers are not looking to replace a damaged
product, this is the manufacturer’s responsibility.
• Faulty design or formula. Insurers are not looking to make good any claims that the
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insured’s products are faulty unless some injury or damage has occurred as a result.
C4 Pollution liability insurance

Indemnity is provided to the insured in respect of pollution or contamination caused by a
sudden identifiable, unintended and unexpected incident which takes place in entirety at a
specific moment in time and place during any period of insurance.
All pollution or contamination arising out of one incident is treated as one claim. This is
regardless of how many separate parties are affected or whether the damage spans more
than one policy period.
The policy indemnity limit is in the aggregate during any one period of insurance. This cover
does not always appear as a separate section in a policy.
Example 6.4
In China pollution liability insurance is usually an extension under public liability insurance
and has a sub-limit.
C5 Professional indemnity insurance

This covers professional people’s liability for injury, damage or financial loss to clients or the
public resulting from a breach of professional duty or negligent acts, errors or omissions.
Most claims arise for financial loss.
Example 6.5
An insurance broker gives advice on fire insurance to a client wishing to insure a factory.
The broker gets the business and then forgets to place the cover. The broker has clearly
been negligent. If the factory burns down, the client has suffered a loss as a result of this
and the broker would be liable to pay damages.
Professional indemnity cover is intended to provide insurance against the possibility of
having to pay such damages which in this case could be the value of the fire loss
plus costs.
Consider this…
Try to think of some other examples where a professional may give advice which a client
follows and then suffers some sort of loss.
It could be an architect designing a house incorrectly or a stockbroker recommending
buying shares in a failing company.
With professional negligence, the courts may award damages for pure financial loss. This is
particularly relevant as the courts would not usually allow a claim unless there is also injury
or damage. An example of pure financial loss would be where a stockbroker negligently
advises a client to buy weak shares – there must still be negligence, but the only loss is
financial. (Dishonesty of the insured is usually excluded.)
It is usual for the policies to offer cover on a claims made basis, i.e. the policy applies to
claims made against the insured during the period of insurance, rather than losses
occurring during the policy period. This is why most professional indemnity policies will also
contain a retroactive date.
D Cyber insurance
This is an important and often overlooked protection for consumers and commercial
customers. Think about your own home, internet access/connectivity is key, so much so that
some now refer to it as a basic utility (like water, gas and electricity), and even as a human
right. Think about the company you work for and your own role, could you do your job
without IT? Think about this course, could you be assessed without IT?
Cyber insurance can relate to both damage of physical property (including the data on it),
pecuniary loss following interruption, and liability to third parties in respect of loss of or
damage to third party property or loss of third party data.
Chapter 6
To understand this type of insurance, think about all the possible situations that could be
indemnified in relation to IT and IT systems, which more traditional forms of insurance
protection may not cover, such as:
• loss of data (e.g. electronic ledgers) or software;
• theft of money through electronic systems;
• loss of business following interruption to electronic systems;
• extortion by third parties who threaten to release sensitive data if they are not paid or
specific demands are not met;
• reputational risk following loss of data, including customer data (there have been several
well-publicised incidents involving retailers, banks and utility companies in the last
few years);
• cost of paying damages (compensation) to third parties, such as customers, following the
loss of personal data or interruption in access to systems;
• defence costs in the event of any action brought against a company following loss of
customer data; and
• cost of paying damages arising from torts such as negligence or defamation or breach of
privacy.
It would make sense to separate out such scenarios – you can think of them as first party
(i.e. in relation to the proposer’s assets or finances) or third party (i.e. in relation to the
proposer’s duty of care to third parties and their property).
Even with the high profile data breaches reported in the media, take up of these policies is
mixed. Their availability also varies.
Some insurers are more specialist and offer comprehensive off-the-shelf products that have
been built on more bespoke programmes for larger customers. Other insurers offer
enhancements to their basic products, with inner limits and restricted covers or restrictive
conditions or exclusions.
The suitability of the product will be dictated by the business seeking the insurance. For
example, retail banks and other organisations holding sensitive customer information,
particularly consumer information, may need more protection than a metal working business,
for example, with commercial customers only.
The availability of such products can be affected by the proposer – what existing protections
do they have in place? For example, do they have adequate network security? Do they
regularly back up their data to an external location and, if so, how frequently?
The need for this cover has even been recognised by Pool Re in the widening of its cover to
members to include limited forms of protection against cyber events.
This is a new and emerging cover requirement for most businesses. Demand is not yet being
seen in the consumer space, such as home insurance.
Activity
Think about the future and technological developments, such as driverless cars, could this
create a cover need we have not yet thought of?
Chapter 6
Key points
Property insurance
• Standard fire cover is often made up of three parts:

– fire (excluding explosion resulting from fire, earthquake or subterranean fire, and its
own spontaneous fermentation or heating);
– lightning; and
– explosion (restricted to explosion of boilers or gas used for domestic
purposes only).
• Commercial property insurance policies cover fire and special perils.
• Certain causes of damage are excluded.
• Theft has a specific meaning in insurance. In some countries, it must involve a forced
entry to be considered theft.
Pecuniary insurance
• Business interruption insurance covers the actual or potential loss of earnings and
additional expenses incurred as a result of a material loss covered under property
insurance.
• In assessing the need for business interruption insurance it is necessary to estimate
the maximum time the income of the business could be affected as a result of damage.
• The main items insured under a business interruption policy are:
– loss of profit; and
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– increased cost of working incurred in order to reduce the loss of profit following the
insured event. Such costs should be economic and be less than the amount of profit
saved.
• Legal expenses policies cover companies’ costs arising out of the need to take action
in the courts or to defend an action brought against them.
Liability insurance
• Employers’ liability or workmen’s compensation insurance provides cover to the

insured (the employer) against damages they are legally liable to pay to an employee.
• Public liability insurance provides an indemnity to the insured for legal liability to third
parties for damages (including claimants’ costs and expenses) related to bodily injury,
death, disease or illness, and for any loss of or damage to property which happens in
connection with the business insured under the policy and occurring during the period
of insurance.
• For product liability, cover is for consequential loss following actual injury or damage.
Financial loss is not usually covered unless accompanied by bodily injury or loss of or
damage to property.
• Under pollution liability insurance, indemnity is provided to the insured in respect of
pollution or contamination caused by a sudden identifiable, unintended and
unexpected incident which takes place at a specific time and place during a period of
insurance.
• Professional indemnity insurance covers professional people’s liability for injury,
damage or financial loss to clients or the public as a result of breach of professional
duty, or negligent acts, errors or omissions in their professional capacity.
Cyber insurance
• This is a new type of insurance protection that is arguably still emerging. The need for
it has increased as more traditional policies have not been able to cater for the sorts of
losses and damages that have increased with our reliance on IT.
• The cover needed can be wider and does not easily fit within existing descriptions of
insurance.
Key points
• It is best to think about situations that could be indemnified under one of two
categories: first party (i.e. in relation to the proposer's assets or finances) or third party
(i.e. in relation to the proposer's duty of care to third parties and their property).
• The level of cover provided varies between insurer and is largely dictated by the level
of protection adopted by a proposer.
Chapter 6
Question answers
6.1 Examples include:
• builders or timber merchants whose materials are often stored in a yard; and
• retailers selling plants which are often stored in the open overnight.
6.2 Non-negotiable items include:

• crossed cheques;
• crossed bankers’ drafts;
• crossed postal orders;
• crossed money orders;
• unused units in franking machines;
• premium bonds; and
• credit company sales vouchers.
6.3 a. Probably not. It sounds like a genuine accident. However, Anuj would have a
legitimate claim if the tea cup handle fell off as a result of damage incurred
while in Raj's ownership. Raj has a duty of care to ensure that all work
equipment, including tea cups, used by his employees is safe and fit for its
intended purpose.
b. Yes. If the guard was missing from the machine. It is Raj's responsibility to
provide safe work equipment with all dangerous moving parts guarded to
prevent injury to users, so he will be liable here.
c. No. It was after work, and not in the course of employment so the fact that they
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were on the factory site is probably irrelevant.

d. Yes. Raj is liable as he should make sure it is safe for people to visit. But the
customer isn't an employee so the employers' liability policy wouldn't respond.
However, public liability insurance probably would.
e. Yes. Raj is liable for the acts and negligence of his employees acting in the
course of their employment, even if they are 'playing about' and someone is
injured. It is likely Raj would be responsible here and the policy would respond
to any claim.
6.4 • A sign hanging from an insured’s premises may fall down and injure a passer-by.
• Customers could slip on a wet floor and hurt themselves.
• A loose roof tile could blow from the insured’s building, damaging a vehicle
parked on the street.
The list is endless – any potential liability could have been named. The legal liability
covers all forms, not just negligence, but nuisance, trespass and liability under
statute.
Self-test questions
1. What are the three basic perils covered by 'standard' fire cover?
2. What four groups of exclusions apply to an 'all risks' fire insurance policy?
3. Name two optional extensions to a standard money policy.
4. What is the purpose of business interruption insurance?
5. What are the main sections contained within a commercial legal expenses policy?
6. What is the standard policy cover under a product liability insurance?
7. What is the standard policy cover under a professional indemnity insurance?

Chapter 6
Related services
7
outcomes
Introduction
A Helplines 7.1
B Authorised repairers and suppliers 7.1
C Risk control and advice 7.1
D Uninsured loss recovery services 7.1
Key points
Question answers
Self-test questions
Learning objectives
• describe the main types of ‘support’-type insurance services available, with specific
reference to:
– helplines and their relevance;
– the use of authorised repairers;
– risk management; and
Chapter 7
– the recovery of uninsured losses.
Introduction
Here we cover issues that fall within the domain of insurance-related services, as well as
concepts such as risk management. For clarity, this chapter considers value-added services
as part of the main insurance contract, and not add-ons or other policies that are often sold
with it (e.g. extended warranties, payment impairment products).
Key terms
Authorised repairers Helplines Risk analysis Risk control

and suppliers
Risk identification Risk surveyor Uninsured loss
recovery services
A Helplines
Helplines or advice lines are mainly freephone numbers, often operating 24 hours a day,
providing emergency assistance and expert advice to insurance policyholders.
Consider this…
Can you give some examples of where helplines may be used?
Examples of where helplines may be used include:

• Private motor insurance: providing policyholders with 24-hour access to a call centre for
assistance in the event of a vehicle breakdown. The insured will usually only pay for
labour and parts, depending on the policy terms.
• Household insurance: providing legal advice and legal costs services, emergency
services which provide immediate assistance in emergencies whether or not relating to
claims, e.g. plumbers, carpenters and builders.
• Travel insurance: most travel insurers provide cover for a medical emergency service.
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This is usually operated by a specialist company providing a 24-hour multi-lingual helpline

facility. In an emergency, the company will advise or organise the necessary medical
treatment or repatriation (getting the policyholder back home) facility.
Consider this…
The number of households insured is very low in some parts of the world. For example, in
India 3% of houses are insured compared to 90–97% in countries such as the UK, USA,
Australia and France.
There are many other types of helpline, and the above serves only to illustrate the facility.
Example 7.1
Mr Chen has comprehensive motor insurance covering his vehicle. While stationary at a
red light, Mr Chen’s vehicle is hit from behind by Mr Wang’s. Mr Wang admits liability for
the incident. Usually, Mr Chen’s insurers would have his vehicle repaired and Mr Chen
would have to pay an amount on collecting his vehicle (the policy excess).
This scenario raises certain issues/questions, for instance:
• How do Mr Chen’s insurers arrange his vehicle repairs?
• As Mr Chen’s insurers have made a payment, his no claims discount (NCD) may be
affected. (It is, after all, a ‘no claims discount’, not a ‘no blame discount’!) What
redress, if any, would Mr Chen have?
• Mr Chen had to pay his policy excess – how can he get this back?
Chapter 7 Related services 7/3
Mr Chen might contact a helpline to discuss what he can do about the losses he has
incurred for which he is not insured under his own policy. As we will see, these might
include his excess, out-of-pocket expenses and medical expenses.
B Authorised repairers and suppliers

Household insurers offer emergency services, providing policyholders with access to
preferred/recommended contractors. Typically, the contractor, e.g. a plumber, would attend
the callout and assuming it is a valid claim, submit their invoice directly to the insurers. Such
contractors or suppliers are authorised repairers.
Authorised repairers are most commonly used in motor insurance. Private motor insurers
have a panel of authorised or approved repairers and when a claim is reported, insurers will
usually either provide policyholders with details of authorised repairers in their area or
directly instruct an approved repairer to collect the vehicle and carry out the work. This
benefits both parties, as the insured gets fast, local service, and the insurer has a satisfied
customer and a reduced claims bill thanks to an arrangement with a chosen repairer.
Question 7.1
Can you think of the main benefits of a panel of authorised repairers to private motor
insurers and customers?
Other considerations are that tow-ins are usually arranged if a vehicle is not driveable as a
result of an accident. Equipment, such as digital video cameras, means that an ‘insurance
engineer’ can inspect a vehicle without actually visiting the garage carrying out the repairs.
Some authorised repairers in higher density areas may have ‘insurance engineers’ based
permanently at their premises.
C Risk control and advice

Risk control and advice (also known as ‘risk management’) is part of the process of
assessing the risk. Here we shall look at the concept in more depth.
Risk management could be described as:
Chapter 7
The identification, analysis and economic control of those risks which can threaten
the assets or earning capacity of an enterprise.
From this description, three steps can be identified in managing a risk:
• risk identification;
• risk analysis; and
• risk control.
The identification of a risk involves analysis of both the upside and downside of risk. The
upside of risk relates to the failure to maximise opportunities while the downside involves
discovering what threats already exist and what potential threats exist in the future. As we
know, the initial assessment of the risk by underwriters is often carried out by examining the
proposal form and, if necessary, through a physical examination or survey to assist in
identifying the existing and potential risks.
Risk analysis involves examining past data to evaluate the risk. For example, an insurer
could look at the frequency and severity of fire claims at thatched properties to predict the
number and average size of such claims in the future. Such analysis will help identify
measures that could be taken to control the risk, such as lining the inside of a chimney with
fire resistant material.
Risk control involves putting into action plans to reduce and even eliminate the risk.
The two main courses of action for insurers are:

• Physical control measures (of the risk): e.g. requiring that approved locks are fitted to
the doors of a home or business to reduce the theft risk.
• Financial control measures (of the potential loss): e.g. imposing an excess, arranging
reinsurance.
The risk surveyor (sometimes called the loss control or risk engineer) is the ‘eyes and ears’
of the insurer, identifying risks which the insured can either:
• eliminate, e.g. prohibiting smoking in workshops containing combustible materials; or
• control, e.g. storing combustible waste materials at least ten metres away from buildings
to prevent the spread of fire.
The risk surveyor should work closely with the underwriter in identifying the measures to
control risk and ensuring the policy terms reflect these.
D Uninsured loss recovery services

Going back to Mr Chen from earlier, we will see that there are various ‘uninsured losses’ that
Mr Chen may want to recover. For example, if Mr Chen’s insurer did not provide a courtesy
car, he may need to hire a vehicle. He may have suffered personal injury and require specific
medical assistance.
Question 7.2
Can you think of any other uninsured losses that Mr Chen may have suffered?
There are various situations that arise in connection with motor insurance where the insured
may have no cover but potentially has a legal right to recover losses from another person.
This would occur if Mr Chen’s own policy was for third party, fire and theft or third party only,
rather than comprehensive cover. In these cases, Mr Chen would, in effect, be ‘uninsured’
for his own damage.
Consider this…
Are you sure you understand exactly why Mr Chen would, in effect, be uninsured by his
Chapter 7
own insurers?
It is because the insurers will not pay for any damage repair to the insured vehicle as this is
an exclusion under lower level insurance, i.e. not comprehensive cover.
Many insurers adhere to the general principles that provide for a quick decision either
admitting or denying liability for third party damage. If liable, they will arrange for the third
party repairs (or payment of pre-accident value of vehicles if they are written off) and the
provision of a replacement car at no cost to the innocent party.
It is important to note that increased insurance premiums due to loss of an NCD are not
recoverable as an uninsured loss. This is because when the insurer, having met the own
damage claim, reduces the insured’s NCD but later recovers the money it spent, the insured
will be reimbursed the increased premium due to the initial loss of NCD.
Internationally, some insurance intermediaries will provide assistance in respect of the
recovery of uninsured losses but practice varies. In such countries, accident management
companies and lawyers may also offer additional services like vehicle replacement or the
pursuit of personal injury claims. These are often on a ‘no win, no fee’ basis. Lawyers can be
instructed under a legal expenses policy which is usually purchased in conjunction with a
motor policy to provide cover for exactly this contingency. The wordings of these policies
vary but essentially they will provide an indemnity for legal expenses in pursuing an
uninsured loss claim, where reasonable prospects of success exist. There will always be an
indemnity limit in the relevant currency.
Key points
Helplines
• Helplines are used to provide both information and assistance.
Authorised repairers and suppliers
• Authorised repairers are often used to make the repair and recovery process more
efficacious.
Risk control and advice
• Risk management could be described as the identification, analysis and economic

control of those risks which can threaten the assets or earning capacity of an
enterprise.
• The identification of a risk involves analysis of both the upside and downside of risk.
• Risk analysis involves examining past data to evaluate the risk.
• Risk control involves putting into action plans to reduce and even eliminate the risk.
Uninsured loss recovery services
• In the event of a claim, an insured may also suffer losses that are not covered by the
insurance policy itself. To recover such losses, there are uninsured loss recovery
services available in some countries, such as solicitors and specialised firms.
Chapter 7
Question answers
7.1 The main benefits are:
• Convenience for both insurer and client.
• Price: a price reduction on labour and parts is usually negotiated, benefiting the
insurer in terms of the final cost of accidents, and customers as cost savings can
ultimately be passed on in reduced premiums.
• Competence: a sub-standard repairer would soon be removed from the panel. In
addition, panel members often offer wider guarantees or services while the car is
in for repair.
7.2 Other examples are loss of earnings, loss of amenities, loss of use, inconvenience.
(This list is not exhaustive. There are many other examples.)
Chapter 7
Self-test questions
1. Give an example of how a helpline may be used for travel insurance.
2. With what type of insurance are authorised repairers most commonly used?
3. How is risk management defined?
4. What are the two main components of controlling risk?
5. What is an 'uninsured loss'?

Chapter 7
Underwriting
8
considerations
outcomes
Introduction
A Basic principles of underwriting 9.1
B Specific underwriting considerations 8.1, 8.2, 9.1, 9.2
C Fraud: prevention, detection and consequences 8.6, 8.7, 8.8
D Fair treatment of customers 8.9
Key points
Question answers
Self-test questions
Learning objectives
• describe underwriting principles both generally and in connection with specific classes of
business;
• identify the procedures used to prevent and detect fraudulent claims; and
• explain the consequences of fraudulent claims on insurers, insureds and fraudulent
claimants.
Chapter 8
Introduction
We have already discussed the nature of insurance as a ‘common pool’, with the
contributions of many people going into the pool to meet the losses of a few.
It is essentially the underwriter’s task to manage this pool effectively and profitably. The
underwriter must:
• assess the risk that a person brings to the pool;
• decide whether to accept the risk;
• determine the terms, conditions and scope of cover to be offered; and
• calculate a suitable premium.
In this chapter, we look firstly at the principles of underwriting in a general sense, before
applying the principles to the particular types of insurance. We also consider fraud and its
consequences for insurance and underwriting.
Key terms
Fraud prevention Role of the claims Specific underwriting

and detection handler considerations
A Basic principles of underwriting

In relation to general (non-life) insurance, we can distinguish insurers’ general approach to
underwriting in respect of personal insurances and commercial insurances.
Underwriting personal insurances can be relatively straightforward. The proposal form is the
main source of information and, if needed, an individual underwriter can request additional
information from the proposer, taking care to ensure that any information requested, and
then supplied, is replayed to the proposer in the post-quotation and post-sale policy
documentation (e.g. within a statement of fact).
The underwriting of commercial business insurances is generally more complicated as unlike
personal lines business the risks vary considerably.
Commercial insurances range from small shops and factories to large multi-national
corporations with operations in many countries throughout the world. Risks can range from a
few vehicles belonging to a company to aircraft and satellites. The degree of complexity of
the underwriting required will obviously vary with the sheer size of the risk, but certain
principles are still recognised.
Chapter 8
The insurance underwriting process will always consist of an assessment of the following:
• The major underwriting factors affecting claims experience for the particular class of
business. For example, woodworkers use potentially dangerous machinery; it is of no
surprise therefore that the injury rate for employees in the woodworking industry is more
frequent and severe than injuries to office workers. Similarly, the frequency and severity
of fire incidents in factories and shops (mainly related to electrical faults) is higher than
that presented by, say, schools and colleges.
• The ‘average’ claim per member of the group.
• The proposer’s characteristics in comparison with the ‘average’ member. For example,
consider the extraction ducts above deep fat fryers in a fast food restaurant. The
restaurant or risk with good cleaning procedures, e.g. weekly filter cleaning and
bi-monthly duct cleaning, is less likely to suffer a duct-related fire than one whose
cleaning routine is less frequent or structured.
In essence, the underwriter is evaluating the hazard associated with the risk which is being
proposed.
Question 8.1
What factors will always be assessed in the underwriting process?
Chapter 8 Underwriting considerations 8/3
B Specific underwriting considerations

Consider this…
Before moving on to each class of insurance, try and think of some examples of factors
that would affect you, as an underwriter, when deciding whether to accept a risk and on
what terms. Also, think about why they would affect the process.
B1 Motor insurance
Many different factors are used in the motor insurance underwriting process. Several are
equally relevant to private cars, motor cycles and commercial vehicles. Some of the key
factors are:
• Driver’s age. This is relevant because certain age groups are probably more susceptible
to claims than others. For example, those in the 17–25 age group, which will include the
less experienced driver and those lacking risk awareness (which could evidence a poor
moral hazard), will expect to be charged more than those in the 40–50 age group who
have more experience and probably drive more sedately.
• Type and make of vehicle. Expensive, rare or unusual vehicles will be more expensive
and/or difficult to repair; powerful vehicles will be more difficult to control, especially in the
hands of an inexperienced driver (this is a good example of how the different factors
interrelate). Commercial vehicles attract higher premiums due to their frequency and
nature of use, value, size and type of cargo, resulting in an increased third party property
damage or bodily injury risk.
• Type of use. A vehicle used for social purposes is inevitably going to spend less time on
the road than a commercial vehicle. Also, within the categories of commercial use, some
vehicles will be less susceptible to damage than others. Large haulage vehicles that are
part of a fleet present a different risk from a small van owned and operated by the same
person.
• Geographical area. Some areas have higher vehicle theft rates than others. Also, where
there are more vehicles on the road, there is more chance of an accident occurring.
• Storage. Where the vehicle is kept overnight or when not in use; a vehicle in a garage is
less likely to be stolen than one left out on the road and would also be less likely to be
subject to malicious damage.
• Driving record. Previous claims history is important here; a poor claims history may be
evidence of poor moral hazard, as would previous convictions.
• Cover required and/or extensions requested. The wider the cover the more risk is
brought to the ‘pool’, so the underwriter should apply higher premiums and impose
different terms.
Chapter 8
• Vehicle modifications. Expensive stereo equipment or addition of racing wheels
increases the risk of theft.
B2 Health insurance
Health insurance can be used to provide compensation in the event of death by accident,
mitigate loss of income, pay for any expenses incurred if unable to work or finance the cost
of private medical care. With this in mind, it is easier to appreciate the range of underwriting
factors that apply when assessing a health insurance risk:
• Occupation. This is a major rating factor for both personal accident and group health
insurance. The general practice is to group occupations into four or five main classes,
imposing premiums according to the level of accident or health risk involved. The classes
will range from no or low accident/health risk (e.g. professional and administrative
classes), to high or extra-hazardous risk (e.g. miners).
• Age. Generally, the risk of illness increases with age, but in respect of accidents young
people represent a higher risk as they are less aware of and take more risks.
• Family circumstances. This will often include specific financial details for applications
for health insurance to ensure that benefits are not excessive.
• Lifestyle and physical condition. A person’s lifestyle can have a significant effect on
general health and longevity. For example, smoking is the primary cause of lung cancer
and greatly affects the likelihood of heart disease. Obesity can also negatively affect
health.
• Medical history. This is particularly important for a health policy where the underwriter is
accepting a greater potential liability than for, say, an accident only policy. Close
consideration needs to be given to the risk of a serious illness or accident leading to
extended disability. In some circumstances a medical examination is required.
B3 Personal insurances
B3A Household insurance
Regarding the building, some of the most important factors in household insurance are its:
• Construction. Insurers are concerned here with what the house is made of. If it is not
made of brick, stone or concrete, or not roofed with slates, tiles, metal or concrete, it
would be an increased risk and therefore an additional premium would be charged, e.g.
for wooden structures.
• Location. Some insurers have invested heavily in systems which allow for robust risk
assessment of key risks such as storm, flood, subsidence, crime and arson relative to a
specific area. For those insurers who do not have the benefit of such systems, local
knowledge will be used.
Regarding contents, insurers will be concerned with:
• Area. Some districts represent higher theft risks.
• Occupation during the day. Sometimes discounts are provided if the property is occupied
during the day.
• Security. A minimum level of security may be expected for higher value contents and
sometimes discounts may be given if an intruder alarm is fitted.
The type and level of cover is clearly relevant. Is cover just for the buildings or the buildings
and contents combined? Does cover apply only while items are in the home? Or is it
required for contents/belongings away from the home? Does cover include expensive
jewellery or other high-value items? All this information will be the subject of questions on the
proposal form.
B3B Travel insurance
All the following aspects would require special consideration:
• Destination. Medical expenses can be notoriously expensive in certain countries,
e.g. USA.
• Purpose and duration of travel. Whether for a holiday or business.
Chapter 8
• Group policies. This would involve situations where a whole group of people related or
connected in some way could be involved in the same accident if travelling together.
• Existence of pre-existing conditions. Underwriters would want to establish if the
insured was suffering from a condition that could result in a claim, e.g. heart disease, and
may wish to exclude medical expenses cover in respect of the condition.
B4 Commercial property insurance

B4A Fire and special perils
The main factors are:
• Use. Is the building used as a garage, office or is it a fireworks factory, for example?
• Types of goods stored on the premises. Bulk storage of combustible materials such as
paper, cloth or highly flammable substances increase the likelihood of extensive damage.
• Construction and material. Brick, steel frame, timber. In recent years risks which feature
composite panels have been given a high profile.
• Safety features. For example, fire alarms, fire walls, sprinkler systems.
• Risk management features. For example, housekeeping, control of contractors, audit
and inspection, and maintenance.
• Number of floors and area.

• Method of heating and lighting.
• Location relative to perils. For example, storm, flood, subsidence, theft and arson.
The rating factors for ‘all risks’ insurance are essentially the same, but require deeper
consideration of premium and terms as the cover is much wider.
B4B Theft insurance
Important considerations are:
• Trade. Some trades are naturally more vulnerable to theft than others. For example, a
jeweller would be more vulnerable than a bookshop.
• Geographical area. Again, some areas are more susceptible to theft.
• Any moral hazard of the owner.
• Nature and construction of the property.
• Theft precautions. For example, intruder alarms, CCTV, security guards, security
lighting etc.
B4C Glass insurance
The main considerations here would be the use of the building (in relation to the likelihood of
glass being broken) and the geographical area. Vandalism is one of the main concerns when
considering insuring large shop windows.
B4D Money insurance
In addition to knowing how much money is handled (cash, cheques) an insurer will want to
know of precautions taken in storing and transporting money, whether there is a safe and/or
strongroom, and how employees are paid. If they are paid in cash, there is a greater risk of a
large amount of cash being on the premises. A business which handles a lot of cash such as
a shop will be more at risk of a loss than one where most transactions are on account and
money is transferred electronically.
B5 Pecuniary insurances
B5A Business interruption insurance
Consider this…
Remind yourself of what is covered by business interruption insurance, and then try to
think what an insurer’s main concern would be with a business interruption proposal.
Essentially, an insurer is concerned with how quickly a proposer can get their business up
and running again after an incident/interruption occurs. For example:
• Could they operate from other premises? Chapter 8
• Is replacement machinery readily available?
• Are there any critical pieces of machinery? Or is there any interdependency between
production lines and/or sites?
• Are there any seasonal features? The insured may be dependent upon key times of the
year and damage at these times could have a significant impact on the business.
• External dependencies such as suppliers, customers and utilities.
As well as considering the above factors, the business interruption underwriter would also
assess similar risks to an underwriter for property insurance. These are described as
physical features.
B6 Liability insurance
Underwriting factors are different for the type of liability cover required:
• Employers’ liability/workmen’s compensation. Underwriting factors would include the
nature of the business, its location, the occupation, number and salaries of employees,
the likelihood of injury or occupational disease.
• Public liability. The major consideration here is the proposer’s trade or business.
Because of the nature of the cover, if a proposer has little or no contact with the public,
there would be little risk of liability to them. On the other hand, consider the situation
where a large hotelier requires this insurance – they have a lot of contact with the public
and therefore represent a higher risk than, for example, an office.
• Pollution liability. Risk assessment is heavily weighted towards trade, the materials
used and whether there are adequate controls to prevent the escape of pollutants into the
air or water. You will recall that the cover only operates from sudden identifiable events.
Underwriters will want to know what chemicals are used, details of their storage
arrangements, and risk control measures such as bunding.
• Product liability. As with public liability, the principal consideration is the proposer’s
trade or business. A drug manufacturer’s potential exposure and risk would be, for
example, greater than a business which manufactures socks. During the risk assessment
process underwriters will specifically consider the final use of the product and its potential
to cause bodily injury or damage to third party property. From a risk management
perspective, quality control systems would be of particular significance. Underwriters are
also keen to know about any goods being exported to North America where there can be
a significant increase in the product liability exposure. This is something the underwriter
needs to consider and charge for.
• Professional indemnity. Underwriting considerations here will mainly be geared towards
assessing the exact occupation, professional qualifications, experience and degree of
moral hazard. The risk premium will be relative to the potential consequences of
poor advice.
B7 Extended warranties
Extended warranty policies are usually sold at the point of sale of the product to be covered.
Statistics would be produced by the insurer to assess the likelihood of a product breaking
down over a period of time and the premium would be set accordingly.
B8 Credit rating
Many insurers in both the personal lines and commercial insurance markets now consider a
proposer’s credit worthiness, both as part of their acceptance of a risk, and as a potential
rating factor. This is not specific to one line or class of business, as across most lines a link
has been detected (but not yet fully understood) between propensity to claim, claim
Chapter 8
frequency, average cost per claim and loss ratio, and credit rating. This is worth
thinking about.
Consider this…
Can you think of any other underwriting or rating factors that are used across all lines of
business to the same effect?
C Fraud: prevention, detection and

consequences
Insurance fraud can take many forms and the following are just a few examples:
• Inventing a loss that never took place such as a burglary.
• Exaggerating the number of items stolen during an otherwise honestly reported break-in.
• Deliberately creating an insured event. For example, throwing paint on a carpet at home.
• Exaggerating the effects of an insured event. For example, claiming whiplash after a
minor car accident where no injuries were received in order to claim compensation.
It is difficult to quantify insurance fraud because so much goes undetected. However,

quantifying it by collecting data on the types and amounts of fraud is becoming increasingly
important. Many believe that quantifying the effects of fraud is the first step towards
eliminating it.
Example 8.1
Insurance fraud is such a serious matter that India’s Supreme Court instructed all State
Governments and insurance companies to come up with guidelines to help curb it.
Consider this…
What do you think are the consequences of fraud?
If a fraudulent claim is paid, its impact on various parties is far reaching:

• The insurers. The cost of fraud is significant. If individual insurers do not take it seriously,
it will affect their bottom line (profit). Claim costs will rise, impacting on premiums and
making them less competitive. They may even get a reputation as an easy target which
could lead to genuine insureds avoiding them.
• The insureds. Even the genuine policyholders will be affected by the commensurate
increase in premiums, not just the fraudsters.
• Fraudulent claimants. If fraudsters get away with it once, the temptation will be to
continue this practice in the future.
All insurers take steps to prevent, detect and combat fraud. The insurance industry has a
number of bodies concerned with helping to minimise fraud and raise awareness of the
problem and its effects.
Technology is often used to detect fraud. Databases and registers, for example, enable
information to be shared between insurers and between insurers and other bodies such as
government departments. Insurers can match new claim details to those already on the
database and can, for example, check whether theft of a vehicle is being claimed for more
than once.
Example 8.2
As India moves towards these shared databases the Insurance Information Bureau (IIB),
the Insurance Regulatory and Development Authority’s (IRDAI) insurance data repository,
has developed a web-enabled facility to hold policy details and track the claims status of
motor vehicles. It has been provided to assist victims of road accidents to obtain policy
details of other vehicles involved and the name of their insurers.
The Indian Government has also started to collect vehicle registration information online
Chapter 8
through VAHAN. This is a nationwide database that insurers can access for a fee to help
check for potential fraud. vahan.nic.in/nrservices/
Example 8.3
In Saudi Arabia Najm allows residents to check their no claims bonus, accident liabilities in
line with traffic authorities’ decisions, claims management information and policy status.
Other countries, including Saudi Arabia, have integrated insurers’ systems to provide
information on whether specific vehicles are insured, allowing eligible vehicle owners to
renew their vehicle registration online.
Example 8.4
The Art Loss Register is a collaboration between the insurance industry and the art world
to address art theft. It relies on subscriptions from insurers and aims to increase the
recovery rate of stolen art and antiques and to deter theft by making the resale of stolen
items more difficult.
The register is available to the insurance industry, the art trade, law enforcement and
customs agencies, collectors and museums.
www.artloss.com
The role of the claims handler

What can the individual claims handler do to combat fraud?
The claims handler plays a vital part in detecting fraud. Methods of detection vary across
classes of business but there are many common indicators. For example, claims handlers
are trained to be cautious with claims:
• made soon after the policy starts or is renewed;
• where the insured has no documentation for lost items; and
• where the insured has several similar claims for accidental loss or damage within a short
space of time.
Other measures within the insurance industry have also had the effect of combating fraud
while actually being implemented to enhance customer service and cut costs. For example:
• Completing claim forms over the telephone. Individuals often find it harder to lie on the
telephone than when filling in a form. The use of ‘anti-fraud lie detectors’ over the
telephone has also been the subject of some media coverage as a way of reducing fraud.
• Claims settlement by replacement rather than cash. If a fraudster claims for a ‘stolen’
television to get cash, they will be frustrated at having to sell the replaced television to get
the money. The fraud would still be successful but this would hopefully act as a future
deterrent.
Insurance industry executives often seek to eliminate fraud as a means of gaining an
advantage over their competitors. This may prove to be the most powerful incentive of all in
reducing insurance fraud.
So far we have talked about fraud in the context of claims but it is important to realise that
fraud can also be committed when a proposer applies for a policy. This is known as
application fraud by some insurers. In addition to reviewing the questions they ask at the
proposal stage, insurers are looking at ways to obtain data from other sources, either to
supplement information they cannot obtain from the proposer, or to validate information
which has already been provided.
Chapter 8
D Fair treatment of customers

It is good practice for insurers to have a documented underwriting philosophy which forms
the basis of their practices and enables them to demonstrate that they are treating
customers fairly.
From an underwriting perspective, less favourable treatment is justified only if it is based on
information that is relevant to the assessment of the risk. This includes actuarial or statistical
data, medical information and individuals’ medical reports.
In some countries, there is legislation to protect certain types of customer from unfair
treatment when dealing with organisations, including insurers. Depending on the regulatory
environment, certain initiatives exist to deliver fair outcomes to all customers.
On the Web
For the CII's Code of Ethics, see bit.ly/2UnNlgn.
Key points
Basic principles of underwriting
• The insurance underwriting process consists of an assessment of the following:

– The major underwriting factors affecting claims experience for the particular class of
business.
– The ‘average’ claim per member of the group.
– The proposer’s characteristics in comparison with the ‘average’ member.
• In essence, the underwriter is evaluating the hazard associated with the risk which is
being proposed.
Specific underwriting considerations
• The underwriting of commercial business insurances is generally more complicated as

unlike personal lines business the risks differ considerably.
• An underwriter will consider different underwriting factors depending upon the class of
business.
Fraud: prevention, detection and consequences
• Insurance fraud is a significant problem for the industry and can take many forms
including:
– inventing a loss that never took place;
– deliberately creating an insured event; and
– exaggerating the effects of an insured event.
• The claims handler plays a vital part in detecting fraud. Methods of detection vary
across the different classes of business.
• Bodies exist to help minimise the occurrence of fraud and maximise awareness of the
problem and its effects.
Chapter 8
Question answers
8.1 The following will always be assessed in the underwriting process:
• the main factors that affect claims for the particular class of business;
• the 'average' claim per member of the group; and
• the proposer's characteristics compared to the 'average' member.
Chapter 8
Self-test questions
1. What is the principal task of an underwriter?
2. Give five underwriting factors relating to motor insurance for an individual.
3. What is the main rating factor for health insurance?
4. What are the main rating factors for household buildings insurance?
5. What is an underwriter's principal concern when considering a proposal for business

interruption insurance?
6. What is the effect of fraud on genuine policyholders?

Chapter 8
Establishing the
9
price: rating factors
outcomes
Introduction
A Data required 9.1
B Importance of claims information 9.2
C Frequency and severity of claims 9.3
D Claims loss ratios 9.4
E Account performance and monitoring 9.5
Key points
Question answers
Self-test questions
Learning objectives
• describe the types of operational data needed by senior management to implement
underwriting policy;
• explain the significance of claims information on underwriting terms and premium rates;
• explain the relationship between frequency and severity as components of risk;
• explain claims loss ratios and their impact on premiums and acceptance of risk; and
• explain and compare the different types of monitoring and accounting periods used.
Chapter 9
Introduction
The insurance market is affected by an extremely wide variety of factors. These factors can
be within the control of insurers such as their targeted products and markets, and
competitive performance. Others, however, are outside insurers’ control such as poor
weather and natural disasters. As well as meeting the needs of customers and claimants,
insurers also need to satisfy the demands of shareholders and other interested bodies such
as regulators, monitoring agencies and the Government.
The financial demands on an insurance company are clearly vast and as in all business
ventures insurers need to make profits to meet these demands.
To enable an insurer to make the required profits, extensive planning is required and the
most appropriate method of planning is via the use of data or management information.
Management information should flow back to the decision maker who then analyses the
detail to develop plans and strategies.
Here we shall focus on the type of data required in order to make decisions about insurance
underwriting processes, in particular rating and pricing. You will gain an insight into the role
of claims data and how claims loss ratios and different types of monitoring periods are used
in the decision-making process.
Key terms
Account Accounting year Calendar year Claims information

performance
Claims loss ratios Data required Earned loss ratio Frequency
Monitoring Operational data Outstanding loss Policy year
ratio
Reporting Severity Underwriting year
A Data required
Insurers, like all large companies, make decisions at different levels and therefore require
different types and amounts of information. We can break down the levels of decision as
follows: board level decisions, managers’ decisions and operational decisions. We can see
the different levels as an information pyramid.
Figure 9.1:
Board level
Chapter 9
reporting
Reporting to
underwriting managers
Operational
data
Chapter 9 Establishing the price: rating factors 9/3
• Board level: here, directors are concerned with group performance/profitability, the
control of downside risk (e.g. through catastrophe reinsurance) and broad strategy
implementation.
• Managerial level: managers will be responsible for different divisions within the business,
e.g., sales, underwriting, personnel, and therefore require information that is specific to
their area of responsibility. For instance, a property underwriting manager would be
particularly interested in accidental damage losses, weather-related data and details of
large claims; while a sales manager/director would be interested in new business activity
and renewal retention levels.
• Operational level: the issues will surround the implementation on a day-to-day basis of
the underwriting practices and procedures established by the management team. Data
will focus on customer service levels, accuracy of claims handling and settlement,
documentation and credit control.
We will now consider the type of information required at each level. This is a broad
breakdown and serves to illustrate the focus required.
A1 Board level reporting

Issues concerned at this level are as follows:
• growth: gross and net (i.e. how is the premium growing, both in total and net of
reinsurance?);
• loss ratios: gross and net (i.e. what is the relationship of claims to premium income?);
• underwriting margin/profit;
• business mix: by class, distribution channels, geography;
• exposure accumulations: i.e. is there an exposure to a particular loss by virtue of writing
too much business in a particular class or area?;
• competitive positioning: how the company compares to its competitors;
• return on capital: profit expressed as percentage of capital; and
• solvency: relationship between the capital and exposure to risk, usually expressed in
terms of premium income.
A2 Reporting to underwriting managers

Reporting will generally be monthly. The key consideration is to look at trends over time and
this data will often be presented geographically. Issues concerned are:
• growth by product;
• retention rates (i.e. how much business is being kept and not lost to a competitor);
• new business flow analysis;
• lapse flow analysis, i.e. lost business;
• loss ratios;
• claims trends – frequency and severity, average cost per claim;
• underlying claims;
• large losses – frequency and severity;
• weather-related losses – frequency and severity;
Chapter 9
• reserve consistency;
• rate changes and increase in end price to customer (e.g. rate, indexation);
• commission rate (to intermediaries);
• expense ratios (i.e. what is the total level of costs compared to premium?);
• exposure accumulations; and
• market share and competitor activity.
A3 Operational data
This level requires monthly, and often weekly, reporting, for instance by intermediary, policy
class or by underwriter. Specific information provided includes:
• loss ratio claims statistics – frequency/severity/large losses/claims movements;
• new business;
• retention;
• rate increases;
• credit control; and
• compliance with contract certainty standards.
An insurer will need to extract the data for the above from their various electronic platforms.
Not many insurers (if any) will have the information all on one platform. Departments are
created to provide the necessary reporting mechanisms.
B Importance of claims information

Claims are the principal ‘cost of production’ for an insurer and the accurate analysis of past
claims histories (and flowing from this, forecasting the future cost of claims) is crucial to the
profitability of an insurer’s underwriting account.
We mentioned briefly in Reporting to underwriting managers on page 9/3 that the
identification of trends is a key consideration for the underwriting manager when making
decisions regarding underwriting terms and premiums.
Analysing claims information in various ways provides the underwriting manager with the
information needed to ensure that predictions can be made about the future loss pattern and,
in turn, the premium needed to cover the anticipated future claims costs.
There are many different ways that this analysis can be done but much of the detail of claims
analysis techniques is outside the scope of this course. However, the significance of claims
information on underwriting terms and premium rates can be appreciated through an
understanding of the range of questions the underwriter will be asking when studying the
claims data.
Consider this…
What type of management information will an underwriter be interested in? And, what
questions will they be asking when they study claims data?
When analysing claims data underwriters will consider:

• Looking at each year chronologically, is the experience improving or deteriorating?
• Is the number of claims each year increasing or decreasing (considering large versus
attritional (volume))?
• Is the average cost of claims each year increasing or decreasing (considering large
versus attritional (volume))?
• What are the causes of the claims?
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• Are there any large claims that are distorting the pattern?
• Are individual claims reserves accurate, given the nature of the claim?
• What is the position regarding underlying claims?
• How are the claims recorded:
– year of notification; or
– underwriting year?
Reinforce
Attritional refers to non-catastrophe loss events.
Whatever form the analysis of past claims information takes, it is only a part, albeit an
important part, of the wider activity of assessing risk premium.
Before we consider further the relationship between claims and premium calculation, we
need to understand the nature of risk and, in particular, the significance of the frequency and
severity of claims.
C Frequency and severity of claims

Risk is usually assessed in terms of:
• Frequency: how often will it happen?
• Severity: when it does happen, how serious will it be?
Factors relating to both frequency and severity must be taken into account in our
assessment of risk. This relationship will vary from one risk to another.
Example 9.1
Imagine a house on a river which is prone to overflowing its banks. This involves risk. It is
uncertain whether the river will overflow and, if it does, when it will happen. Imagine,
then, a second house 100 metres away at the top of a slight hill. Here, there is a lower risk
of flooding.
Our view on the level of risk may change if we consider the potential amount of damage.
If the first house is worth US$20,000 and the second house US$200,000, we might
amend our view of which is the greater risk in view of the higher potential severity of loss.
Insurers must, therefore, take into account the factors of both frequency and severity in
their assessment of risk
Figure 9.2: Relationship between frequency and severity
Frequency
Severity B
The left-hand side of the graph at point 'A' shows the high frequency/low severity claims
which, based on the law of large numbers, tend to be predictable.
The right-hand side of the graph at point 'B' shows the low frequency/high severity claims,
which are difficult to predict owing to their random nature.
High frequency and low severity
With high frequency and low severity risks there will be a large number of small losses and
relatively few large losses. Examples include theft of mobile phones or broken car
Chapter 9
windscreen claims. Research into industrial incidents has shown a similar pattern.
Such losses are relatively predictable and may be referred to as the 'underlying claims cost'
and should approximately be in direct proportion to the number of exposure units insured. A
prudent underwriter should be able to predict these loss levels up to a certain degree of
tolerance. For example, on a property account you might expect between 20% and 25% of
the total premium to be exposed to underlying claims costs, i.e. excluding weather and large
losses which have a degree of volatility attached to them.
Low frequency and high severity
Here, the situation is the reverse. There will be fewer incidents but when they do occur the
result will be far more serious.
Good examples of this type of risk include the Exxon Valdez oil spill and the Bombay High oil
field fire. Technological advances can help to reduce the frequency of such incidents.
These losses are far less predictable than the high frequency low severity type. As a result,
an insurer will take out reinsurance to protect itself against such volatility.
Refer to
See Reinsurance on page 11/4, for more on reinsurance
Reinsurance will apply to:

• specific large losses; or
• an accumulation of exposures which create a large loss for the insurer following a single
event; or
• the effects of an accumulation of events over a specific period.
As part of this process insurers will monitor accumulation.
Consider this…
Can you think of any perils/scenarios that could give rise to an accumulation of risk for a
property insurer?
You may have thought of a number of things such as:

• fire (which can spread between premises);
• insuring a number of insureds occupying the same premises;
• insuring both the landlord and the tenant of the same property; and
• storm and flood (which can affect a number of properties in the same area).
D Claims loss ratios

We can now start to consider the relationship between claims and premium and, in
particular, the claims loss ratio.
A claims loss ratio is the ratio of claims to premiums. It is calculated by dividing the amount
of claims incurred by the amount of premium received:
claim incurred
Claims ratio = × 100
premium
Example 9.2
If company A’s motor account had a premium income of US$100,000 and claims of US
$103,000, the claims ratio would be:
103, 000
× 100 = 103 %
100, 000
Claims ratios are very useful indicators of how an account is running. In this section we will
look at the main variations used in the analysis of data.
Chapter 9
D1 Earned loss ratio (ELR)

Here we introduce the concept of earned premium. If an insurer starts cover on 1 July and its
financial year runs from 1 January until 31 December, then it will only have earned 50% of
the premium in the financial year in which the premium is entered into the accounts (or is
‘booked’).
An earned loss ratio can then be calculated by comparison of the claims for the period up
until 31 December with the premium earned as above.
Earned loss ratios may be adjusted at account level to reflect reinsurance spend and IBNR
(incurred but not reported) claims. The latter deals with the need to reserve for claims which
have not yet come to light, but nevertheless may occur. Emerging risks provide an example
of this in respect of liability.
Consider this…
There is rarely a shortage of stories in the media about the potential consequences for our
health and welfare of lifestyle choices, social trends, legislative, technological and
environmental developments. What do you think might constitute an emerging risk that
insurers need to prepare for?
There are a whole range of issues you might have thought of, including:
• climate change;
• environmental degradation;
• international cyber attacks;
• changing disease patterns; and
• social, political and economic instability.
When measuring ELR at policy level or broker level, IBNR and reinsurance are not taken into
account.
IBNR claims are considered to be a funding issue at account level and are considered only
when analysing the ‘bigger picture’ and the future prosperity of the account.
The concern at policy and broker level is to consider the relative profitability of the individual
policy or broker relative to other brokers and policies and achievement of a target ELR which
is acceptable. This target ELR will show that there is still a need to make additional
allowances for IBNR at account level.
D2 Outstanding loss ratio (OLR)

The outstanding loss ratio is extracted directly from the computer system or claims files and
does not recognise the fact that 100% of the premium has not yet been earned. Instead
claims are compared against 'booked' premium and as such are of fairly limited value.
E Account performance and monitoring

Armed with all this information regarding claims and premiums, managers must also make
decisions about periods over which this information should be monitored.
The main types of monitoring period are:
• policy year;
• underwriting year;
• calendar year; and
• accounting year.
Each has its own area of use and value.
In order to compare the different approaches, we shall use the data in the table 9.1.
Table 9.1:
Policy details Claims details
Chapter 9
Policy period Premium (US$) Date of loss Value (US$)
Policy A 01/07/14–30/06/15 1,000 01/12/2015 100

01/07/15–30/06/16 1,500 01/03/2016 250
01/07/16–30/06/17 2,000
Policy B 10/04/13–09/04/14 5,000 01/07/2013 1,000

10/04/14–09/04/15 4,000 01/02/2014 2,500
10/04/15–09/04/16 5,000 01/05/2015 10,000
10/04/16–09/04/17 4,500 28/06/2016 3,000
E1 Policy year
Policy year tracking is suitable for addressing the performance of individual policies.
Generally, each twelve-month period would constitute a separate policy year.
Using the figures in table 9.1, the data for Policy A would be presented as follows:
Table 9.2:
Period Premium Claims
Number Value
Year 1: 01/07/2014– 1,000 0 0

30/06/2015
Year 2: 01/07/2015– 1,500 2 350

30/06/2016
Year 3: 01/07/2016– 2,000 0 0

30/06/2017
Totals 4,500 2 350
Consider this…
Do you consider the claims experience for this policy to be acceptable?
From the above example you will see that US$4,500 has been booked and a total of US$350
in claims has been incurred. This means that the outstanding loss ratio is 7.8% which would
be considered a good return for the insurer.
Question 9.1
If the data above was extracted on 30 April 2017 what would the ELR be?
E2 Underwriting year
This type of monitoring period is used at account level, with individual policy data being
grouped into underwriting years based on the year in which the policy begins (or renews).
Assuming policy periods are twelve months long, two years will elapse between the start of
the underwriting year and the last date of cover of the last policy to be attached to that year.
However, those risks will have been subject to the particular underwriting and pricing
philosophy in use during the underwriting year. The monitoring period therefore focuses on
both claims trends and also the impact of decision-making as it develops with time.
In studying table 9.3, compiled from the example data, you’ll see that underwriting year data
is simply the sum of policy year data, allocating policies on the basis of the first year of the
policy period.
Chapter 9
Table 9.3:
Underwriting Number of Premium Number of Claims value Loss ratio
year policies claims
01/01/2013– 1 5,000 2 3,500 70.0%

31/12/2013
01/01/2014– 2 5,000 0 0 0.0%

31/12/2014
01/01/2015– 2 6,500 3 10,350 159.2%

31/12/2015
01/01/2016– 2 6,500 1 3,000 46.2%

31/12/2016
Totals 23,000 6 16,850 73.3%

(Four year)
Totals 18,000 4 13,350 74.2%

(Three year)
Totals 13,000 4 13,350 102.7%

(Two year)
E3 Calendar year
With this type of monitoring, premiums and claims from individual policies are allocated to a
calendar year as follows:
Claims are allocated to the relevant year on the basis of the date of loss. Using the data
from table 9.1, the claims would be presented as follows:
Table 9.4:
Calendar year Number of claims Claims value
2013 1 1,000
2014 1 2,500
2015 2 10,100
2016 2 3,250
2017 0 0
Totals 6 16,850
Premiums are allocated according to that portion of the policy premium that is earned during
the relevant calendar year.
Example 9.3
If a policy ran from 1 July 2015 to 30 June 2016 and the premium was US$1,000, only half
(US$500) the premium would have been ‘earned’ in 2015, because only half the policy
year is in 2015, the other half being in 2016.
Chapter 9
E4 Accounting year
This is similar to the calendar year approach, but with the following modifications:
• The period will depend on the organisation’s financial year, e.g. 01/10–30/09, rather than
01/01–31/12.
• Prospective premium and claims developments from the accounting year end have to be
estimated.
Because estimates are incorporated, trends are harder to detect; therefore, this information
should only be used to support decision-making as a last resort.
Key points
Data required
• Data is required throughout an insurance company. This includes board, management

and operational level.
Importance of claims information
• Claims are the principal ‘cost of production’ for an insurer and the accurate analysis of
past claims histories is crucial to the profitability of an insurer’s underwriting account.
Frequency and severity of claims
• Insurers are concerned with both the frequency and severity of claims.
Claims loss ratios
• The earned loss ratio (ELR) provides the most accurate measure of performance at
policy level.
Account performance and monitoring
• Performance will be monitored at account level on a regular basis.

Chapter 9
Question answers
9.1 To calculate the ELR we need to consider what premium has been earned.
• In Years 1 and 2 the full premium has been earned, i.e. US$2,500.
• In Year 3 only 10 months has been earned so of US$2,000 is used in the
calculation, i.e. US$1,666.
• Total earned premium is therefore US$4,166.
• ELR is therefore as follows:
US$350
= 8 .40 %
US$4, 166
Chapter 9
Self-test questions
1. What are the three levels of the 'information pyramid' in a typical insurance
company?
2. What issues are considered at board level?
3. What issues are considered at underwriting managers' level?
4. What is the relationship between the frequency and severity of risk?
5. If company A had premium income of US$75,000 and claims of US$100,000, what

would the claims loss ratio be on these figures?
6. What is the difference between a policy year and an underwriting year?
7. When it comes to monitoring periods, what is the difference between a calendar year
and an accounting year?
Chapter 9
Establishing the price:
10
pricing factors
outcomes
Introduction
A Risk premium 10.1
B Expenses 10.2
C Return on capital employed (ROCE) 10.2
D Investment income 10.2
E Tax 10.2
Key points
Question answers
Self-test questions
Learning objectives
• identify and explain the underlying factors that should be considered in assessing a risk
premium;
• describe the effect of expense costs on premium rates; and
• identify the concept of the return on capital employed (ROCE).
Chapter 10
Introduction
In this chapter, we consider how risk premiums are assessed and the expenses that affect
premium rates. We go on to explore the concept of return on capital employed (ROCE), the
role of investment income, and premium taxes.
Key terms
Catastrophe claims Claims inflation Claims run-off Commission

Expenses Exposure Fraud Incurred but not
reported (IBNR)
claims
Investment income Large claims Latent claims Reinsurance cost
Return on capital Risk premium
employed (ROCE)
A Risk premium
Risk premium can be defined as:
the expected ultimate cost in claims of the risk being accepted, including an
allowance for the degree of uncertainty attaching to the claims cost (whether in the
estimating process or through the nature of the claims themselves).
It can be further defined as representing the amount of money required today to fund claims,
i.e the time value of the money is taken into account.
In other words, it is the premium required to cover the total cost of claims, recognising that in
some cases these may take some considerable time to settle. An example would be an
employer’s or other third party’s liability claim for an industrial disease. It could take several
years to identify the existence and impact of the disease and then several more years to
settle the claim. By the time settlement is made, inflation and other external factors such as
changes in legislation could mean that the real cost of settlement is many times higher than
it would have been had the claim been settled in the policy year.
Consider this…
Can you think of any industrial diseases whose symptoms are identified many years after
exposure?
We will look briefly at the key features of risk premium and some of the issues surrounding
its calculation.
A1 Frequency
The expected number of claims should be forecast accurately. It should also account for
anticipated changes in the environment, the portfolio of risks and the individual risks.
Each distinctive type of claim should be projected separately.
You would expect a higher frequency on a motor account than on a fire account, simply
because motor accidents are more common than fire and special perils claims.
A2 Severity
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Likewise, the average cost of different types of claim should be assessed. The average cost
of a fire claim would tend to be higher than a motor accident. An allowance should always be
made for catastrophes which could include cyclones, flooding, landslides, earthquakes and
hurricanes.
Chapter 10 Establishing the price: pricing factors 10/3
A3 Large claims
For any class of business, an underwriter needs to consider how many large claims they
can expect and how much they need to allow for these claims.
Large claims play a disproportionate role in pricing and profitability, with smaller insurers
being particularly disadvantaged as their portfolio is less likely to be able to absorb such
losses. Large claims, specifically those involving liability to third parties, are increasingly
impacting future ratings in some regions.
A4 Reinsurance cost
Refer to
Reinsurance on page 11/4 explains basic reinsurance considerations
In order to protect the company from catastrophic single or combined losses (e.g. an
earthquake for a property insurer) insurers often buy reinsurance protection. The variety of
types of cover available is outside the scope of this course, but it is important to understand
that these costs must be factored in to the pricing of the product costs (the premium).
This cost will vary by class and company. The more significant it is, the more important it is
that the underwriter allocates its cost fairly to avoid creating a competitive pricing
disadvantage.
A5 Claims run-off
Claims data should be adjusted to allow for the provisional nature of case estimates.
Underwriters should be aware of the source of such data, the purpose for which it was
intended, and how it was reached.
An underwriter will see risks being re-reserved once more information relative to a claim
becomes available. Sometimes claims may be re-opened although you should note that in
respect of liability claims insurers will use precautionary reserves even if the insurer has
declined liability for an incident. This is because an insurer has a regulatory obligation to
identify its potential liabilities and needs to ensure that adequate reserves are in place. The
insurer may decline liability for an incident but could still end up losing the legal argument
and having to pay the claim.
Such claims movements are referred to as run-off and could produce a surplus or a
claims deficit.
A6 IBNR (incurred but not reported) claims

This is a factor that underwriters must consider carefully in establishing pricing.
Example 10.1
At the end of the year underwriters assess the figures and base pricing decisions on those
recorded on 31 December. However, this will only include a certain percentage of claims.
Think about the last few weeks in December – businesses are busy tying things up and
staff often take extended holidays for New Year. This all affects the reporting of claims. In
other words, many claims may have been made which are not recorded on the insurers’
books. These are referred to as incurred but not reported (IBNR). It is important that such
claims are accounted for when assessing the total claims for that underwriting year,
otherwise the figures on which pricing is based are inadequate.
Depending on the class of business and the age of claims, this aspect can be significant and
Chapter 10
it is prudent for an insurer to create precautionary reserves for these eventualities.
A7 Catastrophe claims
Catastrophe claims differ from large claims in the sense that they reflect the accumulation of
a large number of claims, all arising from a common event.
The underwriter needs to estimate both their frequency and severity, manage their
exposures and buy optimal levels of reinsurance cover.
A8 Latent claims
For liability classes, these are an extreme form of IBNR as in some instances latent claims
can exceed 50 years between the cause and the claim. For instance, in the UK and the USA,
asbestos-related diseases such as mesothelioma have been given a high profile with many
insurers having to create reserves now for incidents which occurred over 40 years ago.
These types of claims are referred to as ‘long tail’ claims as the business was written years
before any claims come in. Such claims are now presenting the insurance industry with
serious issues. As many companies in different parts of the world become global, these
types of claims are likely to become more common.
Insurers also need to be aware of new and emerging risks that could give rise to
latent claims.
Question 10.1
Which lines of business are more likely to be affected by latent claims?
A9 Claims inflation
Claims inflation, especially in respect of personal injury claims, often exceeds generic
inflation due to changes in legislation, some of which are retrospective. To take account of
inflation the premium needs to be adjusted to reflect any devaluation of the funds available to
pay claims when they arise.
Be aware
In China inflation is not taken into account and amounts are set using historical data.
A10 Exposure
Claims data is historical and, therefore, should be adjusted to reflect today’s exposure rather
than that when the claims arose. This may require consideration regarding change in the
amount of the exposure and/or changes to the risks relative to the risk presented. For
example, working practices in an industry may have changed meaning certain types of claim
which were previously common to that industry are now unlikely to arise.
Example 10.2
Consider a risk relating to metal working or manufacturing plastics. Traditionally, these
types of risks have presented insurers with a significant ‘manual handling’ risk. However,
following technological advances, many of these processes are done by machines. As a
result, the manual handling risk has reduced substantially.
In such circumstances, it would not be appropriate to price the risk on historical claims
statistics as the risk profile has changed and the old data would not reflect the
improvement in the risk.
A11 Fraud
Several insurers now have dedicated anti-fraud teams, particularly for retail and small to
medium-sized enterprises' insurance policies, which are becoming increasingly
commoditised and traded via e-trade routes (i.e. insurers' websites and online aggregators).
The prevalence of fraud is a key concern, both claims fraud (e.g. fake hospital bills) and
application fraud (misrepresenting information online or changing answers several times to
obtain the best price).
Chapter 10
Insurers are allowing for this cost in their pricing, typically by expressing the increased cost
as a deterioration to their loss ratio. For example, if an insurer writes to a 55% developed
loss ratio via intermediaries, they may increase this loss ratio significantly (for example by
over 10%) to reflect the increased claims cost of transacting business via an electronic route.
B Expenses
We have dealt with risk premium in Risk premium on page 10/2, i.e. the amount of money
required to fund a claim. But it is obvious that this alone would be insufficient reason for an
insurer to take on the risk. What other factors need to be considered?
There is a cost to running an insurance business and this needs to be recovered through the
‘price’ charged. The total of these costs, together with any commission paid, also needs to
be considered. This is essentially an accounting function and underwriting skills would add
little or nothing.
Consider this…
What expenses do you think are incurred in running an insurance business?
Examples of expenses would be:

• staff costs;
• premises;
• electricity and other utilities;
• computers and machinery;
• marketing and advertising; and
• commission paid to agents and brokers.
We will now look at some of these in a little more detail.
B1 Fixed expenses
There will always be a cost associated with processing a particular product. This cost does
not increase with the size of the risk. This is because the accounting entries, record-keeping,
policy issue and certificate production for a given product are likely to be much the same for
a US$1,000 risk as for a US$100,000 risk. Therefore, a fixed amount should be allocated
per policy.
B2 Variable expenses
Some expenses do vary according to the size, complexity and nature of each risk. For
example, larger risks tend to be more complex and require more mid-term changes. They
are also likely to require a higher level of service from surveys and risk management.
The price, therefore, needs to reflect the amount of variable costs for each product line.
Examples of variable costs could be grouped under the following headings:
• underwriting;
• commission; and
• claims handling.
B2A Underwriting
Services such as policy alterations, risk management, disaster recovery planning and
helplines provided to policyholders are independent of the existence or volume of claims.
B2B Commission
Commission is the amount (normally a percentage) paid to the agent, intermediary or broker
who introduces the business to the insurer. It is paid for subsequent periods of insurance. It
can vary considerably by class of business, product, individual cases and country. In India,
for example, the Regulator sets levels of commission which are mandatory. Whatever the
Chapter 10
percentage of commission, it should be transparent and allowed for when pricing.

If there are any special intermediary remuneration schemes allowed by the local Regulator
(for example, in some countries these would include incentives for volume of business, profit
or a combination), the underwriter needs to model the impact into its pricing framework.
B2C Claims handling

This cost varies according to the number and complexity of claims so there should be:
• a charge per claim; and
• a charge reflecting the differences in the volume of work required for more
involved cases.
These charges, again, vary by product and claim type.
In summary, while underwriters can add little to the specific process of cost allocation, they
should ensure that the model by which expenses are allocated bears a close resemblance to
the day-to-day realities of what takes up their employees’ time.
B2D Other expenses
In some countries, in certain segments of the commercial insurance market, insurers incur
other costs for the policies they sell. For example, in the real estate market, risk
management funds can be offered to customers to put towards agreed costs of maintaining
and protecting assets. Insurers need to allow for these costs when selling a policy, if they are
to ensure that they are not writing the policy to a loss.
Some commercial insurers also offer low claims rebates (LCRs) or profit shares, which pay
back a proportion of the premium. It will be specified whether this is the net (i.e. no
commission) or gross (i.e. with commission) premium. The aim is usually to incentivise even
more positive risk management by the insured, which should lead to fewer and potentially
smaller claims.
If these tools are set at the correct level, there should be no cost to the insurer, as they
should always operate to deliver the insurer’s target combined operating ratio (COR). But, if
they are set at the wrong level (e.g. miscalculation by the underwriter, market pressure to
write at such levels), they may not be economic and this can disproportionately affect the
insurer’s cost of writing the policy.
C Return on capital employed (ROCE)

The return on capital employed (ROCE) is a key financial concept. The risk capital
requirement, calculated by actuaries, is the proportion of total account premiums which must
be kept as free reserves to ensure that an insurer can meet its claims obligations.
As the return (i.e. profit) is measured as a proportion of the capital employed (ROCE),
classes of insurance with a higher degree of volatility must be capable of generating higher
profits if they are to justify shareholders taking that risk.
It is helpful to think about the need for return on capital in relation to other investment
opportunities. For example, if you had money to invest, one possibility would simply be to put
it in the bank. This would carry virtually no risk. Higher risk investments might carry a greater
return but there is a greater risk of loss too. Think about the stock market over the past
few years.
So, if an investor decides to invest in a company there has to be a return on that investment
which is greater than that from a bank, for example. This is the return on capital.
D Investment income
With general insurance, there has historically been unease at allowing for investment income
in pricing. This section will deal briefly with the relevant general principles.
Consider this…
Chapter 10
Why are insurers able to earn significant amounts from investment income?
Insurers are able to earn investment income by virtue of the substantial amounts of capital
and reserves they control. They are required by law to maintain certain levels of reserves
based on the total premium income they receive. This is to pay for future claims.
They are allowed to invest this income. The income received from this investment process is
another earning stream for the business.
There is some debate about whether this income should be relied on by insurers as it is not
their core business and markets can fluctuate. However, when investment returns are high,
there is a temptation to rely on them and to cut the basic profit margin calculation. In effect,
rates become more competitive to secure more business and premium, which can then be
invested and profits are made on these investments. In theory this is fine, but when
investment returns are cut, the rating structure needs to be robust enough to continue to
produce a return on capital or insurers lose money.
The ‘underwriting result’ is the business result without investment income. It consists of the
combination of the loss ratio, the commission ratio and the expense ratio. This is referred to
as the combined operating ratio (COR) and is a common measure of the financial health of
general insurers. While this figure is a percentage, the underwriting result is an actual profit
or loss value.
It is this relationship between profit and the yield from the underwriting rsult plus investment
income that tends to produce the cyclical nature of insurance. This causes swings between
hard markets (when rates and premiums are higher) and soft markets (when they tend to be
lower to attract more business on which to secure investment returns). The market will turn
from soft to hard when the returns for insurers are inadequate and capital is, as a
consequence, withdrawn. Once the insurance market peaks capital re-enters the market,
and in accordance with supply and demand theory, rates drop and the market becomes soft.
D1 Income only, or capital gains too?

Insurers tend to balance their portfolio between two broad classes of investment:
• interest-bearing investments; and
• investments whose value can be expected to grow at least in line with the economy
(equities).
The latter have tended to generate a higher rate of return over the medium to long term, but
are more volatile in the short to medium term, hence the balance.
If the contributions of capital gains were ignored, returns would be understated, and the
insurer’s products may become overpriced and uncompetitive.
As we saw above, the counterside of this is that if these returns are relied on, the products
may become very competitive, which may be good, but can cause difficulties if the
investment returns diminish.
In the case of India, as with levels of commission, the Regulator stipulates the type of funds
insurers can invest in.
D2 Actual or expected rates of return?

If capital gains are included, as mentioned above, the investment returns are likely to be
volatile. Even the income-only element is likely to move with the economic cycle. Current
yields only reflect historical rates. Therefore, a detached assessment should be made of the
rates expected to be available over the lifetime of the contract.
E Tax
Tax also has to be considered when establishing price. The type of tax varies by region. For
example, Value Added Tax (VAT) is applied to insurance premiums in China, Dubai and
Saudi Arabia; Goods and Services Tax (GST) is levied in India; and some countries have
specific insurance taxes such as Oman and the UK.
Chapter 10
Key points
Risk premium
• Insurers will price the risk to ensure that both the risk premium and their expenses are
covered.
• The risk premium is made up of funding for the following: frequency and severity of
claims, large claims, reinsurance, claims run-off, IBNR claims, catastrophe claims,
latent claims, claims inflation and should reflect the current exposure.
Expenses
• Expenses can be fixed or variable.

• Variable expenses include underwriting costs, commission and claims handling.
Return on capital employed (ROCE)
• An insurer needs to provide a return on capital for its investors. In view of the
associated risk of investing in an insurance company it is necessary to provide a higher
return than that found with a conventional bank account.
Investment income
• Insurers make significant returns following investment of their income. However, these
returns should not be relied on.
Chapter 10
Question answers
10.1 Liability claims are likely to cause the main concern because there is usually a
significant gap between the occurrence of the incident and the extent of the injury or
damage. Most emerging risks are having an impact on the liability lines of business
too. This is unlike property claims where the cost of damage is known within a
relatively short time.
Chapter 10
Self-test questions
1. What is the risk premium?
2. What is the difference between incurred but not reported (IBNR) and run-off claims?
3. Why is claims inflation a problem for insurers in fixing the price of insurance?
4. What is the difference between fixed and variable expenses?
5. What is ROCE?
Chapter 10
Managing exposure
11
outcomes
Introduction
A Market cycle 11.1
B Risk accumulation 11.2
C Reinsurance 11.3
Key points
Question answers
Self-test questions
Learning objectives
• describe the basic factors influencing the market cycle;
• describe the principles of the accumulation of risk; and
• describe the basic considerations applicable in the purchasing of reinsurance.
Chapter 11
Introduction
Underwriters have an important role in assessing the risks proposed. This assessment must
include both qualitative aspects of the risk, i.e. the specific risks presented (is it a paint
factory or an office block?), and the quantitative aspects, i.e. how substantial the risk is (is it
an industrial plant or a house?). They must ensure that the exposures (e.g. sums insured or
policy limits representing a potential claim) brought to the pool are rated against desired
company standards. The account underwriter or manager is responsible for the wider
implications of exposure control.
This chapter will deal briefly with the problems of the market cycle and risk accumulation,
how they can arise, and also with the principles of reinsurance, one of the steps that can be
taken to manage exposure.
Key terms
Excess of loss Hard market Market cycle Non-proportional

reinsurance
Proportional Reinsurance Risk accumulation Single events
reinsurance
Single risks Soft market Stop loss insurance Surplus
A Market cycle
The classic insurance cycle can be illustrated as follows:
Figure 11.1: The insurance cycle
higher
profits
higher higher capacity

prices for that class
capacity lower
withdrawn prices
lower
profits
It goes without saying that if an insurer experiences higher profits in a particular class of
business, it and its reinsurers will want to increase investment in that class to accept more
business with a view to generating greater profits. Market-wide capacity therefore increases,
but premium rates are reduced as insurers try to maintain market share and underwrite more
new business risks. Unfortunately claims costs rise as a result of claims inflation and this,
plus a reduced premium rate, affects underwriting profits. The result is a reduction in returns
for investors and eventually the withdrawal of capacity which causes premiums to rise
(supply v. demand). Once insurers are seen to be making good returns again, capital
re-enters the market, rates fall and the cycle is repeated.
This is known as the insurance cycle. During times when rates are reducing the market is
said to be softening, but when rates are increasing the market is said to be hardening.
Chapter 11
Chapter 11 Managing exposure 11/3
Question 11.1
Do rates in the market for different lines of business go ‘hard’ and ‘soft’ at the same
time?
It is very difficult to identify the length of the market cycle. Historically, it varied between two
and five years. But, for example, since 2001 (following the 9/11 attacks which led to
reinsurance costs increasing and capacity reducing), it is hard to pinpoint examples of the
property insurance market hardening. This is important to understand, as there is no reason
why the cycle cannot be longer or shorter depending on economic and other external factors
such as changes in the law or fluctuating oil prices.
From a risk perspective cycles can be shortened in several ways such as, but not
exclusively, by:
• Amendments to legislation that result in new liabilities arising for different classes of
accident, injury or loss where none existed previously.
• More onerous legislation that extends liabilities for current policies which was not
envisaged and so not factored in to premium levels.
• Weather-related incidents which are becoming more frequent due to the effects of climate
change.
• Major disasters such as acts of terrorism. Following the events of 9/11, the worldwide
insurance market turned instantaneously.
There may be economic issues which drive the market cycle too. Insurers are major
investors in financial markets so the impact of their investment returns can affect their own
profitability. If returns are not forthcoming, there is greater emphasis on their underwriting
result which may drive a requirement to apply increased rates.
Example 11.1
In regions like the Middle East, economic factors such as the oil price affect the economic
cycle, in turn determining purchasing power to such an extent that large markets and
industries may see a recession causing fluctuations in insurers’ growth.
B Risk accumulation
Insurers must always be aware of loss exposures arising from:
• single risks; and
• single events.
B1 Single risks
The action will vary depending upon whether the business written is property or liability.
B1A Property and business interruption risks
Taking a fire risk as an example, calculating the maximum exposure for any one risk is not
simply a case of adding the sums insured at a single location, but involves assessing the
estimated maximum loss (EML) which is likely to occur. This is sometimes referred to as
the maximum probable loss (MPL) (or PML in some regions), although some insurers using
MPL also do so as a more conservative assessment.
Example 11.2
A policyholder insures two factories, each valued at US$1m but located 50 metres apart.
A fire in one of the factories is unlikely to spread to the other. Therefore, while the total
value at risk may be US$2m, the EML is only US$1m.
The EML must be accurate to have any purpose – it will have important reinsurance (and
commensurate premium) implications. Once the EML has been calculated, an underwriting
decision must be taken on the desirability of accepting the risk within the gross account. This
Chapter 11
is influenced by the extent to which this risk, when added to other accumulations at that risk,
will aggregate to produce too high an exposure from a single risk.
The risk surveyor plays a critical role in helping to identify the EML. Effective communication
with the underwriter is vital in ensuring that all aspects of the risk in question are understood.
In example 11.2, it would be vital for the underwriter to know that while the factories are 50
metres apart, one is immediately downhill from the other and they are connected by an
underground conveyor belt system (through which a fire might spread).
If the EML is greater than the insurer’s acceptability limits it has two options. Firstly, it could
purchase reinsurance so that it can write 100% of the risk. Or, secondly, it could take a
proportion of the risk and co-insurance could be arranged. Co-insurance is the sharing of a
risk between two or more insurers.
B1B Liability risks
The handling of liability business is slightly different as cover is based on a limit of liability
rather than a sum insured and an EML. In the liability market it is common to encounter
layering of limits of liability.
Example 11.3
An insurer may be presented with a risk relating to the manufacture of electrical goods. It
decides it can only accept a US$2m limit of liability but the proposer requires a US$5m
limit of liability. In these circumstances, the proposer would arrange additional protection
of between US$2m and US$5m with another insurer, i.e. they would purchase excess of
loss insurance for US$3m in excess of US$2m.
B2 Single events
The threat of catastrophe is a phenomenon that insurers have to accept as part of their
business. Many individual losses can result from one catastrophic event, such as the 2015
Tianjin Port explosions, affecting a large number of policies.
An earthquake in a major city, for example, could affect household, commercial, fire, motor,
marine and aviation policies. Here, insurers have to acknowledge such possibilities and seek
the financial stability that catastrophe reinsurance protection can offer.
C Reinsurance
What is reinsurance?
Reinsurance is an extension of the fundamental concept of insurance, that is, the sharing of
risk. It is insurance taken out by an insurer for claims incurred under insurance contracts it
has written. In essence, an insurer insures the risk again.
Why do underwriters seek reinsurance?
There are a number of reasons (although the following list is not exhaustive):
• protection of the account against a single large event, e.g. an earthquake;
• protection of the account against a large claim on a single item, e.g. an art museum;
• protection of company capital;
• protection against fluctuating claims costs from year to year;
• operational capacity, i.e. an insurer may only be able to insure fire risks up to set limit so
prearranged reinsurance facilities in excess of this can ensure an acceptable level of
service is provided to customers;
• entering a new market, e.g. a life company starting a marine or aviation portfolio;
• building up the account;
• minimising loss impact on income generated;
• underwriters’ peace of mind; and
• sharing heavy/hazardous risks.
Chapter 11
Ultimately, insurers want to keep as much premium as possible at the same time as
reinsuring as much risk as they can. No underwriter will want to part with very profitable
business. However, buying some protection against unexpected events may be desirable,
indeed it is a crucial part of managing the overall account and exposures.
The underwriter should always bear in mind that they are legally bound to pay for losses
arising before seeking their indemnity through reinsurers. This can place an obvious strain
on resources.
C1 Types of reinsurance
Essentially, there are two main types of reinsurance:
• proportional; and
• non-proportional.
These can be further sub-divided as follows:
Figure 11.2: Types of reinsurance
Types of
reinsurance
Proportional Non-proportional
Quota share Surplus Excess of loss Stop loss

(also known
as excess of
loss ratio)
C1A Proportional reinsurance

Here, the reinsurer accepts an agreed share of the risk to be put forward for reinsurance
(i.e. ceded) and pays any loss incurred on the same basis.
Proportional reinsurance can be divided into quota share and surplus.
Quota share
With quota share reinsurance, an agreed proportion of all insurances written by an insurer
will fall within the treaty. For example, if an insurer has a treaty covering 60% of its motor
portfolio, the reinsurer would accept liability for 60% of every policy written (even if the
insurer could actually retain certain policies within its own acceptance limits).
The big advantage of this type of reinsurance is that it is very easy to administer as the
reinsurer accepts its proportion as soon as the business is written. It has the obvious
disadvantage, however, that the insurer must pay the reinsurer premiums for risks that it
could retain for its own account.
This form of reinsurance is principally used by new insurance companies or when an existing
company is embarking on a new class of insurance.
Chapter 11
Surplus
With this form of reinsurance, the insurer only reinsures those risks where the sum insured
exceeds its own retention limit (known as a line). The reinsurer would then be responsible for
a proportion of any claim as follows:
sum insured in excess of insurer’s retention limit
total sum insured
Example 11.4
If an insurer fixes its retention limit for commercial property at US$100,000, and arranges
a surplus treaty with a reinsurer(s) to provide reinsurance for up to five lines, i.e. US
$500,000 (US$100,000 × 5), its arrangements may appear as follows:
Policy Sum Amount Amount % reinsured Balance

insured retained reinsured
1 US$100,000 US$100,000 – – –
2 US$300,000 US$100,000 US$200,000 66.67% –
3 US$500,000 US$100,000 US$400,000 80.00% –
4 US$600,000 US$100,000 US$500,000 83.33% –
5 US$700,000 US$100,000 US$500,000 71.43% US$100,000
In respect of policy 5, the insurer would need to arrange facultative reinsurance, which is
reinsurance arranged on an individual basis, and this may delay the acceptance of the risk
which exceeds the insurer’s acceptance limit and its reinsurance lines.
C1B Non-proportional reinsurance

With these types of reinsurance, a reinsurer agrees to contribute to losses exceeding a
specified figure for a premium negotiated with the insurer.
Non-proportional reinsurance can be divided into excess of loss and stop loss (also known
as excess of loss ratio).
Excess of loss
This could be written on a:
• per risk basis; or
• per event basis.
Example 11.5
On a per risk basis, if an insurer enters in to a contract with a reinsurer where the
reinsurer’s liability under an excess of loss reinsurance is for US$100,000 in excess of US
$50,000, this could be illustrated as follows:
Loss Amount Insurer’s liability Reinsurer’s liability Balance
1 US$25,000 US$25,000 – –
2 US$75,000 US$50,000 US$25,000 –
3 US$125,000 US$50,000 US$75,000 –
4 US$200,000 US$50,000 US$100,000 US$50,000
This type of reinsurance is often arranged in layers, for example:

Layer 1: US$100,000 in excess of US$50,000
Chapter 11
In this example, if the insurer did not have any further layers, it would be responsible for
the balance of US$50,000 in loss 4.
On a per event basis, the reinsurer’s liability is based on the total losses incurred by the
insurer due to the occurrence of one event. For example, an earthquake may affect more
than one class of insurance (motor, property) and several insured risks may sustain loss.
Stop loss (excess of loss ratio)

With this type of reinsurance, the insurer is primarily concerned with protecting its loss ratio.
If, for example, an insurer wanted to prevent its maximum loss ratio from exceeding 80%, it
could obtain reinsurance for claims in excess of this figure.
Reinsurers would usually limit their maximum liability and would also generally insist that an
insurer shares in any reinsured loss. Otherwise the insurer would basically be guaranteeing
that it would not suffer an underwriting loss.
Chapter 11
Key points
Market cycle
• The insurance industry is exposed to a market cycle where rates can be seen to be
hard or soft depending upon the status of the market. It is driven by available capital in
the market which in turn is driven by investment returns and underwriting results. The
market cycle can vary by line of business.
Risk accumulation
• Insurers need to monitor their exposures against losses from a single risk or a single
event.
• For single property risks insurers will monitor their accumulations and calculate an
EML. If the EML exceeds the company’s acceptance threshold but it still wants to write
the business, reinsurance or co-insurance needs to be obtained.
• Catastrophe events can affect a number of risks on different accounts. Therefore,
insurers will purchase catastrophe reinsurance to ensure that adequate protection of
the account is provided.
Reinsurance
• Reinsurance comes in various forms. It can be proportional, e.g. quota share or

surplus, or non-proportional, e.g. excess of loss or stop loss.
Chapter 11
Question answers
11.1 Not necessarily, as different lines of business can be affected by different factors, so
while a market might harden in one area such as property, this may not be the case
for, say, motor insurance.
Chapter 11
Self-test questions
1. What factors can shorten the market cycle?
2. With regard to risk accumulation, what are the two areas of potential loss exposure
that insurers must consider?
3. What is an EML?
4. What step might direct insurers take to minimise their potential aggregation of risk
exposures on their fire account?
Chapter 11
i
Chapter 1
self-test answers
1 The three essential elements are:
• offer;
• acceptance; and
• consideration.
2 Utmost good faith in insurance contracts relates to a proposer's duty to disclose all
material information regarding the risk for which they are seeking insurance. The
information must be full and accurate. The principle also applies to the duty placed on
insurers to disclose facts to an insured, e.g. to provide information about the cover
being offered and terms applicable under a policy.
3 A material fact is a fact that would influence an underwriter's decision to accept a risk
and on what terms.
4 Facts that do not need to be disclosed include:
• facts of law;
• facts of public knowledge;
• 'spent' convictions;
• facts that improve the risk;
• facts where the insurer has waived its rights to certain information;
• facts that a survey should have revealed;
• facts an insured did not know;
• facts covered by the policy terms; and
• facts that the insurer already knows, including those that its employee(s) know.
5 The key elements of the duty of disclosure are:
• all material facts and information must be disclosed; and
• the disclosure of all material facts must be substantially correct and made in utmost
good faith.
6 Misrepresentation is a false statement relating to the subject matter of a proposal and
which leads an insurer to enter into a contract.
7 The duty of disclosure applies during negotiations, mid-term if there is an alteration to
the risk and at renewal.
8 A breach of the duty of disclosure may arise by either:
• non-disclosure; or
• misrepresentation.
9 A peril is what gives rise to a loss, while hazard influences the peril.
10 Depending on the class of business and details of the risk, an underwriter can obtain
material information from the following:
• proposal form;
• brokers;
• risk surveys;
• supplementary questionnaires;
• meeting with clients;
• call centres; and
• internet.
ii WUE/March 2023 Insurance underwriting (non-UK)
Chapter 2
self-test answers
1 A quotation can be viewed as an offer by the insurer, and for a contract to come into
force, there must be an acceptance by the proposer. This acceptance must be within
any timescales specified by the insurer.
2 The declaration states that the information supplied in the proposal form is true and
accurate to the best of the proposer's knowledge and belief. It must be signed by the
proposer.
3 General questions are usually common to most general insurances and consist of
items such as name, address and period of insurance. Specific questions relate to the
details of the risk being insured, for example, a description of the subject matter or the
proposer's age.
4 An insurance premium is the amount an insured pays to the insurer for the insurer to
accept the risk. It is the insured's consideration in respect of the insurance contract.
5 A premium is usually arrived at by applying a premium rate to a premium base. A rate
per cent is a price in dollars (or the relevant currency) for each one hundred dollars of
exposure, while a rate per mille is the price for each one thousand dollars.
6 If a premium base is unknown at the start of an insurance period, this can be
estimated and a premium charged on this estimated figure. At the end of the period,
the premium will be adjusted up or down accordingly. The initial premium paid is
known as a deposit premium.
7 A cover note is a document issued as evidence that insurance is in force, pending the
issue of the policy.
iii
Chapter 3
self-test answers
1 An insurance policy will generally consist of the following:
• heading;
• preamble;
• signature clause;
• operative clause;
• exceptions;
• conditions;
• policy schedule; and
• information and facilities.
2 The operative clause outlines the actual cover provided by the policy. It is, therefore,
essentially the most important section of the policy.
3 General exclusions apply to all sections of the policy, while specific exclusions only
apply to particular parts of the policy.
4 The conditions common to most general insurance policies include:
• the insured must observe and fulfil all the terms of the policy;
• the duty of disclosure is a continuing duty (i.e. it amends the legal position);
• duties of the insured in the event of a claim;
• fraudulent claims condition;
• mitigation clause;
• contribution;
• subrogation;
• average;
• arbitration; and
• cancellation.
5 The differences are:
• An excess is the first amount of each and every claim for which an insured is
responsible.
• A franchise is a fixed amount (or time period) acting as a threshold to determine
whether a claim is payable. If this threshold is exceeded, the claim is paid in full; if
not, nothing is payable.
• A deductible is a very large excess.
6 A warranty in an insurance policy is a promise made by the insured that something
will/will not be done or that a certain fact does/does not exist.
7 Conditions in an insurance policy can be divided into the following three groups:
• conditions precedent to the contract;
• conditions subsequent to the contract; and
• conditions precedent to liability.
8 A warranty must be strictly and literally complied with, is written into the policy (unless
implied) and gives the insurer the right to repudiate a breach relevant to a loss or
damage. A representation does not normally appear in the policy, needs only to be
substantially correct, and allows repudiation of a claim only if a breach is material.
iv WUE/March 2023 Insurance underwriting (non-UK)
Chapter 4
self-test answers
1 A renewal notice tells the insured that their insurance contract is about to come to an
end. It invites the insured to renew the policy. The renewal notice will contain the
renewal premium and any proposed changes in the terms and conditions.
2 The administration rates incurred in originally setting up the policy are high and the
policyholder would be considered to have cost the common pool more than average.
They are, therefore, often charged more than simple pro-rata charges.
v
Chapter 5
self-test answers
1 The minimum cover available is third party only. It provides a set limit for third party
property damage cover and unlimited cover for third party bodily injury or death.
2 Although other exclusions may apply, the most common will be:
• wear and tear;
• depreciation;
• loss of use;
• mechanical and electrical failure; and
• tyre damage from blow-outs or punctures.
3 A motor cycle policy only covers the theft of accessories or spare parts if the motor
cycle itself is also stolen.
4 It is called a benefit policy as it is a contract to pay a certain sum of money if a defined
event occurs. There does not need to be a direct financial loss.
5 Private medical insurance provides cover for hospitalisation and treatment resulting
from sickness or injury.
6 'Buildings' are the main structure of the private dwelling and include garages, sheds,
greenhouses and other outbuildings. 'Buildings' also include swimming pools and
tennis courts. Anything you would normally leave behind when you move would be
considered part of the building.
7 The following optional extensions are usually available in addition to the
'standard' cover:
• lack of services or amenities;
• loss of passport;
• hijack; and
• legal expenses.
8 Extended warranty insurance is for repairs to electrical and mechanical goods for a set
period after purchase. Policies are available to cover all electrical products in an
insured's home.
vi WUE/March 2023 Insurance underwriting (non-UK)
Chapter 6
self-test answers
1 'Standard' fire cover is made up of:
• fire;
• lightning; and
• explosion.
2 The four groups of exclusions are:
• absolute exclusions;
• gradually operating exclusions;
• aspects of cover which can be written into the policy (for additional premium); and
• property or risks more suitable to cover under another type of policy.
3 A standard money policy may be extended to include:
• personal accident/assault; and
• credit cards.
4 Business interruption insurance covers the actual or potential loss of earnings and
additional expenses incurred as a result of a material loss covered under a property
insurance.
5 The main sections are:
• employment disputes;
• criminal prosecution defence cover;
• property disputes cover;
• motor cover;
• patents, registered designs, copyright and trademarks cover; and
• taxation proceedings.
6 The standard policy covers legal liability for bodily injury or property damage arising
out of goods or products that an insured has manufactured, constructed, altered,
repaired, serviced, treated, sold, supplied or distributed.
7 Professional indemnity insurance covers professional persons' liability for injury,
damage or financial loss to clients or the public as a result of breach of professional
duty, negligent acts, errors or omissions.
vii
Chapter 7
self-test answers
1 The most common use of a helpline in travel insurance is for emergency medical
service. A policyholder is usually provided with a 24-hour helpline phone number and
in emergencies the company would arrange treatment or repatriation, as appropriate.
2 Authorised repairers are most commonly used in motor insurance. Most insurers have
a countrywide network of such repairers.
3 Risk management can be defined as the identification, analysis and economic control
of those risks which can threaten the assets or earning capacity of an enterprise.
4 The two main components of risk control are:
• physical control measures of the risk; and
• financial control measures of the potential loss.
5 An uninsured loss is any loss that is not covered by insurance. It can range from a
simple policy excess to extensive personal injury.
viii WUE/March 2023 Insurance underwriting (non-UK)
Chapter 8
self-test answers
1 The principal task of an underwriter is to manage the common pool (of funds)
effectively by assessing risk, deciding whether to accept the risk, deciding upon the
terms and conditions of acceptance, and calculating a suitable premium.
2 Many different factors are used in rating motor insurance, and different insurers will
consider different factors to be more important than others. Examples include:
• driver's age;
• type and make of car;
• use of vehicle;
• geographical area;
• where the vehicle is kept;
• driving history;
• modifications to vehicle; and
• cover and extensions.
3 The main rating factor for health insurance is occupation.
4 The most important rating factors for household buildings insurance are construction
and location.
5 With business interruption insurance, an underwriter's principal concern is how quickly
a proposer can get their business up and running again after an incident.
6 Genuine policyholders could see a marked increase in their premiums.
ix
Chapter 9
self-test answers
1 They are:
• board;
• managers; and
• operational level.
2 Issues considered at board level include:
• growth of the company;
• loss ratios;
• underwriting margins;
• mix of business;
• accumulations;
• competitive standing;
• capital returns; and
• solvency.
3 Issues considered at underwriting managers' level include:
• growth by product;
• retention rates;
• loss ratios;
• claims trends;
• new business flow;
• underlying claims;
• large losses;
• weather-related losses;
• market share;
• accumulations;
• rate changes; and
• commissions.
4 The frequency of risk relates to how often a risk happens, while the severity of risk is
concerned with how serious it is.
5 The claims loss ratio would be:
100, 000 100
133.33 % ×
75, 000 1
6 A policy year refers to the actual period of insurance covered by a particular policy, i.e.
start date to end date. An underwriting year refers to the year in which a policy begins,
i.e. if the start date of a policy is 1 July 2017, the underwriting year is 2017 (01/01/17–
31/12/17).
7 With calendar year monitoring, a claim is allocated to an actual calendar year (01/01–
31/12) on the basis of the date of loss, i.e. if the date of loss was in 2017, it is
allocated to the 2017 calendar year. An accounting year will be twelve months long,
but will mirror the insurer's accounting year which is not necessarily 1 January to 31
December.
x WUE/March 2023 Insurance underwriting (non-UK)
Chapter 10
self-test answers
1 The risk premium is the amount of money required to fund claims.
2 Incurred but not reported (IBNR) claims are 'incurred but not reported', i.e. the claim
has happened but the insurer has not been notified. Run-off claims have been
reported to the insurer but following progression of the claim through to negotiation the
claims reserve changes.
3 The value of the money set aside to settle claims will have reduced in real terms.
Underwriters should check Government indices and economic forecasts.
4 Fixed expenses are generally the costs associated with processing a particular
product and do not increase with the size of the risk. Variable expenses, on the other
hand, do vary with the size, complexity and nature of each risk.
5 It is 'return on capital employed' which is the profit made on the capital invested.
xi
Chapter 11
self-test answers
1 Factors that can shorten a market cycle include:
• amendments to legislation, which can result in new or extended liabilities;
• changes in underwriting policy;
• weather-related incidents; and
• major disasters, such as hurricanes or terrorism.
2 The two areas are:
• single risks; and
• single events.
3 EML is 'estimated maximum loss'. It is an amount expressed as a percentage
reflecting the worst financial effect that a loss could have. It could be 100% of the sum
insured but is normally less.
4 They could arrange adequate reinsurance cover.
xiii
Legislation
H
Health Insurance (Amendment) Regulations
2019 (India), 1B
I
Insurance Act 2015, 3E1
Insurance Law of the People’s Republic of
China 2009, Article 16, 1B
Insurance Law of the People’s Republic of
China, Article 17, 3A5
M
Marine Insurance Act 1906, 1B
P
Protection of Policyholders’ Interests
Regulations 2002 (India), 1B
Protection of Policyholders’ Interests
Regulations 2017 (India), 1B
xiv WUE/March 2023 Insurance underwriting (non-UK)
xv
Index
A exceptions, 3A5, 3B
excesses, 3D1
additional cost of working (ACOW), 6B1B expenses, 10B
adjustable premiums, 2C1 other, 10B2D
all risks, 5C3A, 6A2 explosive nuclear assemblies, 3B2
alteration, 3C2 exposure, 10A10
application fraud, 8C express
arbitration, 3C9 conditions, 3A6
Art Loss Register, 8C warranties, 3E1
authorised repairers and suppliers, 7B extended warranties, 5E, 8B7
average, 3C8
F
B
fair treatment of customers, 1B, 8D
bicycles, 5C3C fire and special perils, 6A1
board level reporting, 9A1 underwriting considerations, 8B4A
brokers, 1F1 fixed expenses, 10B1
buildings insurance, 5C1 flat premium, 2C2
business interruption insurance, 6B1, 8B5A fleet insurance, 5A3
franchises, 3D3
fraud, 3C4, 8C, 10A11
C frequency of claims, 9C, 10A1
calendar year, 9E3
call centres, 1F5 G
cancellation, 4B
capital gains, 10D1 general questions, 2B1A
catastrophe claims, 10A7 glass insurance, 6A4, 8B4C
certificates of insurance, 2D, 2D3
claims
handler, 8C
H
handling, 10B2C heading, 3A1
incurred but not reported (IBNR), 10A6 health insurance, 5B
information, 9B underwriting considerations, 8B2
loss ratios, 9D helplines, 7A
run-off, 10A5 household insurance, 5C
commercial vehicles, 5A3 underwriting considerations, 8B3A
commission, 10B2B
comprehensive motor cover, 5A1B
conditions, 3A6, 3C, 3E2, 3E4 I
contamination, 3B4
implied conditions, 3A6
contents insurance, 5C2
increased cost of working, 6B1B
contract certainty, 2E
inflation, 10A9
contractual liability, 3B7
instalments, 2F1, 2F1A
contribution, 3C6
internet, 1F6, 2B
cover notes, 2D, 2D2
investment income, 10D
credit, 2F1, 2F1A
credit rating, 8B8
cyber insurance, 6D L
large claims, 10A3
D latent claims, 10A8
legal expenses, 5C3F, 6B2, 8B5A
declaration, 2B
policy, 7D
deductibles, 3D2
liability insurance, 6C, 8B6
domestic animals, 5C3E
duties of the insured, 3C1
duty of disclosure, 1C, 1C2, 1C3 M
marine policies, 3B6
E market cycle, 11A
material damage proviso, 6B1B
e-risks, 3B5
material facts, 1B, 1C1
earned loss ratio, 9D1
material information, 1B, 1F
earned premium, 9E3
medical expenses, 5B3
employers’ liability insurance/workmen’s
meeting with clients, 1F4
compensation, 6C1
methods of collecting premiums, 2F1
xvi WUE/March 2023 Insurance underwriting (non-UK)
misrepresentation, 1B, 1C1, 1D, 1D1, 3E reasonable precautions, 3C5

money, 6A5 reinsurance
and credit cards, 5C3B cost, 10A4
insurance, 8B4D non-proportional, 11C
monitoring periods, 9E proportional, 11C
moral hazard, 1E renewal(s), 1C3
motor insurance, 2D2, 5A representations, 3E3, 3E4
underwriting considerations, 8B1 riot and civil commotion, 6A1
risk
accumulation, 11B
N analysis, 7C
new business declarations, 2B control, 7C
no claims discount (NCD), 7D identification, 7C
non-disclosure, 1B, 1C3, 1D, 1D1 liability, 8B6
non-payment of premium, 2F2 premium, 10A
surveys, 1F2
O
S
operational data, 9A3
operative clause, 3A4 severity of claims, 9C, 10A2
optional extensions, 6B1A sickness cover, 5B2
outstanding loss ratio (OLR), 9D2 signature, 3A3
single
events, 11B2
P risks, 11B1
sonic bangs, 3B8
pecuniary insurance, 6B, 8B5
specific questions, 2B1B
personal accident benefits, 5B1
standard fire cover, 6A1
physical hazard, 1E
statements of fact, 2B
policies, 2D, 2D1
subrogation, 3C7
conditions, 3C
supplementary questionnaires, 1F3
exceptions, 3B
information and facilities, 3A8
structure, form and content, 3A T
policy
schedule, 3A7 tax, 10E
year, 9E1 terrorism, 3B3
pollution, 3B4 theft insurance, 6A3
pollution liability, 6C4, 8B6 underwriting considerations, 8B4B
preamble, 3A2 third party only cover, 5A1A
premium third party, fire and theft, 5A1A
calculation, 2C travel insurance, 5D
collection methods, 2F1 underwriting considerations, 8B3B
non-payment, 2F2
payment, 2F U
private motor
car insurance, 5A1 underwriting
cycle insurance, 5A2 basic principles of, 8A
exclusions, 5A1D specific considerations, 8B
optional extensions, 5A1C year, 9E2
product liability insurance, 6C3 uninsured loss recovery services, 7D
professional indemnity insurance, 6C5 utmost good faith, 1A, 1C2
property insurance, 6A
underwriting considerations, 8B4
proposal forms, 2B
W
public liability insurance, 6C2 war and related perils, 3B1
warranties, 3E1, 3E4
Q workmen’s compensation insurance, 6C1
quota share reinsurance, 11C1A

quotations, 2A
procedure, 2A1
R
radioactive contamination, 3B2
rate
per cent, 2C
per mille, 2C
Chartered Insurance Institute
3rd Floor, 20 Fenchurch Street,
London EC3M 3BY
tel: +44 (0)20 8989 8464
customer.serv@cii.co.uk
www.cii.co.uk
Chartered Insurance Institute

@CIIGroup
© Chartered Insurance Institute 2023
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Insurance

Updates and amendments

© The Chartered Insurance Institute 2023

Using this study text

Activities: reinforce learning through Key points: act as a memory jogger at

Consider this: stimulating thought Reinforce: encourages you to revisit a

Examples: provide practical illustrations Sources/quotations: cast further light

Summary of learning outcomes Number of questions

2. Understand underwriting procedures relating to the insurance underwriting process. 15

3. Understand insurance policies in relation to the insurance underwriting process. 10

4. Understand renewals and cancellation in relation to the insurance underwriting 3

5. Understand personal insurances in relation to the insurance underwriting process. 3

6. Understand commercial insurances in relation to the insurance underwriting process. 3

7. Understand the main support/ancillary services available in the insurance industry. 2

8. Understand underwriting considerations in relation to the insurance underwriting 13

9. Understand the principles and practices of pricing. 10

Published February 2023

1. Understand the material facts and 5. Understand personal insurances in

Published February 2023 2 of 4

11. Understand managing exposure within CII study texts

Published February 2023 3 of 4

Exam technique/study skills

Published February 2023 4 of 4

Syllabus learning outcome Study text chapter

Study skills and

4: Renewals and cancellation

5: Insurance products: personal insurances

6: Insurance products: commercial insurances

9: Establishing the price: rating factors

10: Establishing the price: pricing factors

11: Managing exposure

Acceptance Brokers Consideration Duty of disclosure

A Utmost good faith

B Material information and material facts

C1 Duration of the duty of disclosure

C2 Disclosure by an intermediary taking out insurance

C3 Facts that do not need to be disclosed

D Non-disclosure and misrepresentation

D1 Fraudulent breach of duty

E Physical and moral hazards

Hazard can be further broken down as follows:

F Obtaining material information

F4 Meeting with clients

The main ideas covered by this chapter can be summarised as follows:

Principles of utmost good faith

• The principle of utmost good faith imposes a duty on proposers to:

What are material information and material facts?

• Material information is something that has a bearing on the risk insured.

Consequences of non-disclosure and misrepresentation

• A breach of the duty of disclosure may arise in two circumstances: non-disclosure,

Physical and moral hazard

• A peril can be defined as that which gives rise to a loss.

Obtaining material information

2. What is meant by the term, 'utmost good faith'?

3. From an insurer's point of view, what is meant by a material fact?

4. Give examples of types of facts that do not need to be disclosed.

5. What are the key elements of the duty of disclosure?

7. When does the duty of disclosure apply?

9. Explain the relationship between a peril and a hazard.

Certificates of Contract certainty Cover notes New business