Operating the Insurance - Research Paper Example

Student’s Name: Instructor’s Name: Course Code & Name: Date of Submission: SECTION A Question 1 Differentiating between pure and speculative risks Pure risk is a form of risk that involves the possibility of a loss occurring or no loss occurs at all, and there no anticipation for any gain. On the other hand, a speculative risk is one that involves three possible outcomes which are loss, gain or no change (Crouhy, Galai and Mark, 2000). Differentiating between diversifiable and none-diversifiable risks According to (Holmes, 2002), a diversifiable risk is the one that is firm- specific and it can be eliminated by diversification. On the other hand, a non-diversifiable risk is one that is attributable to market factors that affect all firms in the industry. Question 2 a) Injury to a child when climbing up shelves in the store. The supermarket can take a third party insurance cover to protect customers who mat get injuries while getting goods within it. It can also assume this risk and take protective measures such as making low-height shelves accessible by all people. b) Injury to a customer by the store’s delivery truck The supermarket should insure its vehicles to provide protection for any injury caused to third parties and their properties. In this case the customer would be duly compensated for the injury caused by the supermarket’s truck. Question 3 Consumer protection laws as they apply to insurance in Australia Insurance policyholders in Australia have high protection as provided for in the Insurance Contracts Act 1984. The Act is coupled with the General Insurance Code of Practice which was revised and effected in July 2012 and promulgated by the Insurance Council of Australia. They have greatly enhanced consumer protection by ensuring fairness in insurance contract agreements with at least ninety eight percent of consumer claims being paid by the insurers. The Australian Consumer Law (ACL) enacted in the competition and Consumer Act 2010 creates a national law which is concerned with far trading and consumer protection. Although the unfair contract terms provisions within the ACL do not directly apply to insurance contracts, a number of consumer protection provisions are included in the Insurance Contracts Act. The most important provision is: In any preceding where there is an allegation of fraudulent failure to comply with the duty of disclosure or fraudulent misrepresentation, the court may allow the insured to recover the whole of the amount payable if the contract had not been avoided or such part the court may think just and equitable in the prevailing circumstances. (Section 52, Insurance Contracts Act) SECTION B Question 1 Life insurance products that Jenny could use to meet future plans and reduce financial risk Life insurance is a legal contract between the insurer and the insured in which the insurer agrees to cover the insured against an unforeseen event and promises to pay a designated amount of money in lump sum upon the occurrence of such event, in exchange of premiums to be paid by the insured. Such events that can be insured and defined within the insurance contract include death, terminal or critical illness. In Jenny’s case, there are number of life insurance products that she can take to protect her financial aspects and enable her to achieve her future plans. a) Life insurance This is life insurance product that covers the insured with the promise by the insurer to pay out a designated lump sum amount upon the death of the insured or diagnosis of a terminal illness. Upon the occurrence of such defined events, the lump sum is paid to meet expenses such as mortgage debts, provide education for children and enable the family to enjoy the same lifestyle they enjoyed when the insured was alive. This would relieve the family of financial stress of meeting these obligations. Therefore, Jenny should approach a life insurance provider to purchase this policy as it will greatly guarantee her family of financially stress-free life should she face death or be diagnosed with a terminal illness that would render her unable to continue with work in her company. The superannuation levy that her company pays is merely about eight percent of total earnings which is inadequate, and hence needs to be supplemented with a life insurance cover. b) Trauma Insurance ( critical Illness Insurance) This is a life insurance product that protects cover against specifically defined illnesses which may include cancer, heart attack or stroke. It provides choice and flexibility of receiving a lump sum payment at a time that is convenient for the insured. It is of essential need for Jenny to take this life insurance product so that in case is diagnosed with any of the critical illnesses defined therein, she might get treatment or even undergo a rehabilitation program that would restore her to her initial life. She would also reduce her working hours and even get some money to pay a helper considering that her children are married. c) Income protection insurance This life insurance product provides protection for the insured’s income by providing an income replacement of up to seventy five percent of the current income of the insured. This is a very important product because life is full of uncertainties that make one unable to work if they occurred. Such contingencies include illness or injury due to an accident. Jenny needs to take this cover to secure her financial life should any of these perils occur to her. She owns a car and uncertainly she may get an accident that would make her unable to continue work in her company. This would also enable her to continue taking care of her elderly parents. d) Total and permanent disability insurance This is life insurance product that pays a lump sum the insured becomes permanently disabled and unable to work ever again. This amount can be used to cover treatment costs, pay accrued debts or even finance investments that would generate streams of income. For Jenny, if any event occurred, this insurance product would enable her to supplement the rent of $550 in financing the loan of $120,000 that she has taken to purchase an investment unit and be able to continue with her normal lifestyle. e) Business Expenses Insurance and Key Person Insurance The business expenses insurance product covers the expenses of the business of a self-employed person when the insured cannot work due to an illness or disability. Such expenses include purchase of raw materials and payment of employees’ salaries. Key person insurance provides cover for losses that can be incurred when a person who is very essential to the success of the business falls sick, becomes injured or even dies. Jenny runs her own company, Commercial Catering and therefore she is the key planner in her business. Could any defined event such as injury, illness or death occur to her making her unable to run her catering company, her business would incur detrimental losses that could even lead to its closure. Hence, she needs to take this cover to ensure that her company is able to meet operational costs and continue as a going concern. Question 2 State of play in the general insurance market The general insurance market is concerned with providing protection to individuals, businesses and institutions against financial loss that could result from unforeseen events such as accidents, floods, or malpractice (Bickelhaupt and Magee, 1974). The general insurers provide protection by spreading the risk over several policies and take up a fraction of the potential loss so that the insured maybe be compensated incase the insured event occurs. Over the last five years the providers of general insurance have continually faced low prices and huge losses due the consequences of global financial crisis (GFC) which was experienced in 200/2009 pronouncing low growth prospects in the general insurance market. Compared to other developed economies of the world, Australia has been performing relatively better despite the fact that Australia is facing falling commodity prices and somehow decreased business investment that have a tremendous impact on the general insurance market. According to report by KPMG, the financial year ending 30th June 2014 recorded an increase in profits by 8.3 percent by Australian insurers compared with the previous year. This improved performance is attributed to increased earnings from premiums, fewer catastrophic claims and stronger returns in both the international and domestic markets for some surveyed general insurers. There has also been an increase in gross written premiums due to increased commercial insurance with personal insurance being relatively flat. Competitive pressures from benign catastrophe environment and the negative impact of the cessation of the Victorian FSL scheme done on 1 July 2013 have led to slow increase in premium. With the absence of natural perils, the reinsurance market has continued to be soft while the reinsurance costs have relatively increased following the restructuring of programs by the general insurers so that they can align with the horizontal requirement enacted by the APRA LAGIC in January 2014. General insurers have taken advantage of quieter weather to direct their focus on key areas of cost reduction. The general insurance providers are taking the advantage of overseas environments which have considerably lower costs and benefits of economies of scale. They have also been focusing their energy on technological development and transformation to shield themselves from current issues such as cyber threats that might have detrimental impacts on their performance. Following the emergence of online insurers, the Australian general insurance market has greatly evolved with low transaction costs and the entrance of non-traditional market general insurance players such as supermarkets. Insurers are nowadays strategically targeting their focus on pricing and risk selection for higher margin businesses that have relatively low frequencies of claims. Increased competition for price by other insurance brands has increased the willingness of the general insurers to opt for higher quality portfolios rather than premium revenue growth. Consequently, it can be seen that the general insurance market has been greatly impacted by increased competitors and advancement in technology. This is undoubtedly beneficial to policy holders as the competition will lead to availability of a variety of products at relatively low priced premiums. This will also lead to more claims being compensated by the insurance providers in a bid to cut a competitive edge in the market. There are various contemporary issues emerging in the general insurance market including global regulatory developments and cyber security risk. With the globalization of business operations, there has emerged the need for the businesses to insure their businesses to guarantee them protection against unforeseen contingencies and enhance their confidence in carrying out business in the vast global market. As result, it calls for a global regulatory framework to oversee the general insurance sector so that contracts entered into between the general insures are legally enforceable. For instance, the International Association of Insurance Supervisors (IAIS) has made the decision that insurance supervisors should supervise the head of an insurance group comprehensively and there should be a global risk-based insurance capital standard. These regulatory changes might lead to increased costs of insurance. The emerging risk of cybercrime is becoming a great concern for businesses as they need to protect their data and information. They need to take the appropriate cover to enhance their network security so that critical information is not manipulated or accessed by unauthorized persons. If such events occur there could be extreme costs to the business and thus there is likelihood of cyber insurance being purchased highly. With the adoption and reliance on Information Technology by many companies, any attempt to interfere with those systems might lead to huge losses, hence the need for cyber insurance. Question 3 The Product Disclosure Statement used in this question was obtained from Medibank Life Insurance a) Critical conditions which are not covered until three months after the commencement of the policy. The life insurance cover with Medibank does not pay an accidental injury, a totally and permanently unable to work or a trauma benefit if the event is as a result of intentional self-injury. For trauma cover Medibank does not pay the benefits in the case of cancer, stroke or heart attack if the condition was discovered or the conditions that led to the diagnose after accepting the policy and within ninety days after the commencement date the date when an increase in compensation amount has been requested or reinstatement of an initially cancelled policy. b) Paying of a trauma A trauma cover is paid upon the occurrence of curtain defined illness in the policy statement, if the policy is in force, and events excluded from the policy do not occur. The life insured is compensated when the following stated conditions occur: cancer, stroke, heart attack, Coronary Artery Bypass Surgery or loss of independent living. The trauma benefit is paid upon diagnosis or survival of such traumatic events. The life benefit amount is reduced by the amount paid for trauma. c) Paying a trauma cover accommodation benefit The trauma cover benefit is paid as a keep up cost for a close family member(s) if the insured suffers any of the defined trauma conditions in the policy and consequently admitted and hospitalized away from home. This accommodation benefit is meant to enable the close family member to travel to where the policy holder is getting medical treatment and take care of him or her, so that he or she can be able to meet his or her expenses during the stay at the hospital. This guarantees the beneficiaries easy financial times and less changes in lifestyle. d) The usefulness of the buyback benefit Buyback option occurs after a claim on a TPD or trauma cover has been paid. After a period of twelve-months after the original claim, the policy holder has the option to reinstate the life insurance back to the original amount of the policy cover. This is important to the policy holder since at the occurrence of another event defined in the cover, he or she will be able to receive benefits of a similar amount to the original claim. This is because after the total amount of the cover reduces by the amount paid on the first claim. e) Plan exclusions under the trauma cover Under the trauma cover, just like any other life insurance cover, no claim can be paid if it arises from any event or medical condition that has been specifically excluded from the insurance policy. In addition, even if the policy holder suffers a condition prescribed in the policy but such a condition is not life-threatening, for example skin cancer or a limb injury, a claim on this condition will not be paid. Question 4 Distinguishing between life insurance products and personal sickness and accident cover Life insurance Life insurance policies are widely available to all people in Australia, insuring the respective policy holders and their families to provide ample and comprehensive cover and protection to them against any unforeseen contingencies (Dorfman and Institute of Life Insurance, 1974). There are many insurance companies in Australia that provide the thousands of types of insurance policies and this provides the public with a large variety of choice policy and the company to buy the policy covers. Term life policies are widely preferred and are most common because they are easy for customers to understand and their initial payment is relatively cheap. There is a variety of choice for the length of term insurance policy, ranging between a few months and ninety nine years. Although there are very many types of life insurance covers, they can be categorized into three main classes, all of which serve the same objective of financially reinstating or helping to adjust the policy holder or family members in perils such as death, disability, illness or injury (McGill, 1967). They include income protection insurance, life cover insurance and critical illness insurance. Income protection cover is a type of insurance policy that c0overs the policy holder in case he or she becomes disabled and incapable of working due to an illness or injury. It compensates the policy holder or beneficiaries by paying a regular and steady stream of income to them on a monthly basis. This payment could be up to seventy five percent of the policy holder’s gross monthly income although it may vary depending on the insurance policy provider. Insurance providers have also increased benefits the Income Protection Insurance policy holders by incorporating a rehabilitation program which aids them to smoothly get back on track. This rehabilitation program entitles the policy holders to a maximum amount of up to fifty percent of their gross salaries and also includes all the resources and training facilities required to get the policy holder back to the work force. Such costs cover the program of rehabilitation, special equipment, modification of the workplace to enhance smooth transition of the policy holder. The critical Illness insurance cover which is also referred to as Trauma Insurance was originally conceptualized in South Africa to save ill people financially. This type of insurance falls under the category of living insurance as it does not wait for the policy holder to die but it provides him or her with the benefits while they still have life. A lump sum amount of payment is made when the policy holder has or is diagnosed with a deadly disease such heart disease, stroke or even cancer. Life cover is a type of insurance cover that covers the burden of expenses by paying out a lump sum amount at the death of the insured. It helps the family of the insured to adapt mentally and emotionally to changes that are caused by death or disability by providing the financial benefits. This policy guarantees the insured that his or her family will enjoy the same lifestyle no matter what would happen to him or her. In general, life insurance products have features and benefits that distinguish it from other insurance products such as personal sickness and accident insurance. They include: a) Life insurance covers the dependents of the policy holder in the case of his or her death. The lump sum amount is paid between seven to fourteen days after the death of the policy holder to enable the dependents to meet any financial obligations. b) The life insurance cover guarantees the policyholders and their family of protection against stress caused by financial hardships due to death or critical illness. c) Additional benefits like rehabilitation enhance smooth transition of policy holder back to his or her job after disability. d) There is increased flexibility of the life insurance that enables the policyholder to increase his or her cover without provision of additional medical proof. Personal sickness and accident insurance Personal sickness and accident insurance policy can provided either as a stand-al lone policy by an individual or group of individuals where a policy is taken by the employer to cover the employees. The policy can also be provided as benefit incorporated in another insurance policy such as travel insurance. Upon the death or injury of the insured as a result of accident or sickness, the policy usually pays out a lump sum amount as benefits. For the claims to be compensated. It must fall within the causes insured and clearly stipulated in the policy. This policy usually covers death, permanent disability and loss of, or loss of use of, a specified body part (such as limb or arm). If the insured suffers a defined injury or sickness during the period of insurance and within the scope of the policy, then he or she or any other person specified in the policy cover receives the compensation benefits. Personal sickness and accident insurance policy also provides an option for weekly body injury benefits to the policy holders for a maximum period of time specified in the certificate of insurance. b).The people who can benefit from personal sickness and accident cover. The personal sickness and accident cover has numerous benefits to the policy holder and the beneficiaries therein indicated in the policy document. When the policy holder gets ill or is involved in an accident, he or she is paid a lump sum amount as stipulated in the contact agreement. This payment is meant to ease the policyholder the financial stress. He or she may also be entitled to weekly benefits payments due to injuries or sicknesses defined in the contract policy for a maximum period stated therein. The beneficiaries who are indicated the contract agreement are paid a lump sum amount upon the death of the insured due to a sickness or injury defined in the insurance contract to cater for expenses incurred or left by the insured, and that they may continue with the same lifestyle they lived before the death of the insured. References Bickelhaupt, D. and Magee, J. (1974). General insurance. Homewood, Ill.: R.D. Irwin. Crouhy, M., Galai, D. and Mark, R. (2000). Risk management. New York: McGraw Hill. Dorfman, M. and Institute of Life Insurance, (1974). Life Insurance Fact Book. 1973. The Journal of Risk and Insurance, 41(3), p.545. Holmes, A. (2002). Risk management. Oxford, U.K.: Capstone Pub. https://life.medibank.com.au/Content/Documents/Medibank_Life_Insurance_PDS.pdf http://www.kpmg.com/AU/en/IssuesAndInsights/ArticlesPublications/Financial-Institutions- Peformance-Survey/Insurance/Pages/general-insurance-industry-review-2014.aspx Read More