Insurance case studies - Essay Example

Insurance Case Studies Income Protection Insurance Questions Explain how information asymmetry may lead to adverse selection. Illustrate your answer using the dealings between Mr. Farid and Prudent Insurance Inc.Information asymmetry occurs when one party has more information than the other. This may result to adverse selection where a risk exposure exists prior to taking an insurance cover as asserted by Skipper and Kwon (2007). Mr. Farid informed the insurance broker for Prudent Insurance Inc.

that he is the company director and he is not involved in manual or outdoor tasks. This is contrary to the actual job description of Mr. Farid. Therefore, the insurance broker may be unable to determine the appropriate premium for Mr. Farid. In addition, Mr. Farid knew of the changes in his health condition and injuries sustained in the workplace, yet he did not disclose this information. 2. If you were the underwriter, would you approve Mr. Farid’s application for income protection insurance?

ExplainI would not approve Mr. Farid’s application for income protection insurance because he already had a heart valve disorder. Considering the nature of his job and the insurance cover he is taking, I would not accept his application because he does not abide by the principle of utmost good faith. Also, Mr. Farid provides information that is not in accordance with his daily tasks.3. Should Prudent Insurance Inc. pay the claim or deny it? ExplainPrudent Insurance Inc. should deny the claim and not pay Mr. Farid. Mr.

Farid took advantage of the broker’s lack of knowledge about his job description and the various tasks that he executes. Mr. Farid does not obey the doctrine of utmost good fait, and even says he is a director at general merchandise Selling Company. The policy compensates the insured against accident and illness that makes him or her to terminate work. In the case of Mr. Farid, his condition may have resulted form the fact that his heart valve was already ill at the time he was taking the insurance policy.

He did not stop working as a result of the insured risks. The number of activities Mr. Farid submitted, with their corresponding hours are not enough to cause him terminate his job.Household Items InsuranceQuestions1. How would the information about Mr. Green’s earlier convictions affect the insurer’s underwriting decision on Mr. Green’s application? ExplainThe principle of utmost good faith requires the insured to disclose all material facts to the insurer or broker. This applies regardless of the fact that the insurer asked specific questions or not. Mr. Green is bound by this doctrine of insurance to have provided all details concerning himself, including a domestic dispute that took place in January 2009.

The contract law requires the policyholder to disclose all information particularly that which may affect the decision of the prudent insurer (Skipper & Kwon, 2007). The underwriter would have reconsidered accepting to cover Mr. Green, as well as the amount of premium to charge on the risk (UNLOCK, 2011). Also, the underwriter may rule the contract null and the insured may get nothing in compensation.2. If you were appointed as an independent adjustor, what would be a fair solution for the dispute between Mr.

Green and the insurer? (Hint: Examine (a) information withheld in relation to adverse selection, (b) industry practice regarding incomplete client forms.Mr. Green would not be compensated because he withheld vital information from the insurer. This makes Sun Insurance Inc. to be unable to come up with the right figure to charge as premium. This limits Sun Insurance inc. and gives Mr. Green an advantage over the insurer. In addition, Mr. Green had been convicted of three offences, which he ought, to have spelt out to the broker.

Any spent, or unspent convictions are taken to be material facts and should be made known to the broker and insurer (UNLOCK, 2011). Therefore, these flaws make Mr. Green to not be entitled to any compensation by Sun Insurance Inc. Moreover, it is industry policy to delay or not effect compensation to a client in case of incomplete or incorrect information. Mr. Green provided information that was not complete. Therefore, if Sun Insurance Inc. decides to default his payment, it would be in line with industry policy.

The industry requires clients to provide information that is not misleading and is genuine. Any instances of misinformation may lead to default in payment.ReferencesSkipper, H. D., & Kwon, W. J. (2007). Risk management and insurance: Perspectives in a global economy. Hoboken, New Jersey: Wiley-Blackwell.UNLOCK. (2011). Insurance- Insurance & convictions: A guide for consumers. Retrieved 30 Nov. 2011, from http://www.unlock.org.uk/xoffenders.aspx?sid=258#why