Saint Peters College Risk Management Discussion

Exercises 6. Insurance Contracts

6-1. The declarations section identifies an insured property as 24 Harborside Drive with a named insured as Selena Gonzalez. The building, which was actually 34 Harborside Avenue, was damaged in a fire. Selena filed for reimbursement. Will the insurer have to pay for the loss? Explain your reasoning.

6-2. Two partners are arguing about which one should be the first named insured on a policy. One partner says, “It makes no difference.” Do you agree? Explain your reasoning.

6-3. An owner of an office building has to choose between an all-risks or named perils insuring agreement. How should she respond? Explain your reasoning.

6-4. Insurance policies exclude certain causes of loss. Is this effectively a violation of the expectations principle? Explain your reasoning.

6-5. An explosion destroys a warehouse during a time when the owner’s Ferrari is parked inside it. Vehicles are not an exclusion under the policy that reimburses loss to the facility. Is the Ferrari covered by the policy? Explain your reasoning.

6-6. A provision in an insurance policy allows either party to cancel the coverage. The insured called the agent and asked that the policy be cancelled. The next day, before the agent took any action, the property was damaged. Is it covered by the policy? Explain your reasoning.

6-7. An insurance policy specifically excludes punitive actions by foreign governments when they cause a loss to. A risk manager has requested removal of this clause. If you were the insurer, would you comply with this request? Explain your reasoning.

6-8. A fast foods chain has a fire insurance policy covering 52 restaurants. The policy excludes buildings under construction. A fire damages a store closed for three days so a new air conditioning system can be installed. Is the loss covered under the policy? Explain your reasoning.

Exercises 7. Underwriting and Ratemaking

7-1. Underwriters seek to develop products with a predictable likelihood of knowing statistical losses. An insurer is evaluating a risk posed by a new Internet business that does not currently exist. Can the underwriter develop a way to establish premiums and limits without historical data? Explain your reasoning.

7-2. Underwriters prefer to understand how an organization approaches loss control before they determine premiums and policy limits. Do you think underwriters should meet with risk managers from large organizations to discuss loss control as part of the process of purchasing or renewing insurance coverage? Explain your reasoning.

7-3. Why do underwriters start the process of establishing rates using a class rating foundation?

7-4. An underwriter is developing a product to reimburse losses for traveling amusement parks, circuses, and fairs. What are some experience rating factors that can be used?

7-5. For the traveling amusement parks, circuses, and fairs underwriting, an insurance company wants to hire an underwriter who can largely use judgment rating to set premiums and limits? What background should such a person have to be hired for this position?

7-6. The CEO and Chief Actuary are discussing the qualifications for a senior underwriter. The CEO says an underwriting background is the most important preparation for a person. The chief actuary disagrees. He says the best preparation is corporate finance. What do you think? Be specific.

7-7. Observers agree that the world of risk is changing faster today than ever previously. Does this pose a risk for underwriting? Explain your reasoning.

7-8. A CEO believes that her insurance company should hire only individuals with an MBA degree to be underwriters. Do you agree? Explain your reasoning.

Engaged Format Answer

A speculative risk exists when we have the possibility of a loss along with the chance to make a profit. Examples are betting on horse races, buying stocks and bonds, and real estate investment. This differs from a pure risk where only a loss is possible.

Since we know that pure risk is a risk in which loss is the only possible outcome, there is no beneficial result. Pure risk is related to events that are beyond the risk-taker’s control and, therefore, a person cannot consciously take on pure risk.

An example is the possibility that a person’s house will be destroyed due to a natural disaster. In this example, it is unlikely that there would be any potential benefit to this risk.

There are products that can be purchased to mitigate pure risk. For example, flood insurance can be used to protect homeowners from the risk that their homes will be destroyed by an overflowing river. Other examples of pure risk events include premature death, identity theft, and career-ending disabilities.