BAF3009 Financial Institutions & MarketsTutorial
TUTORIAL 11:INSURANCE & REINSURANCEQuestion 1
Explain the following concepts:(a)Insurance and why everyone needs it.
Insurance is a contract agreement called the policy, whereby the insurer agrees to pay a pre-determined sum of money i.e. the sum assured to insured or policy holder of beneficiary, upon the occurrence of a particular event inconsideration of premiums (e.g. Monthly or annually)made by policy holderSmall amount (premiums) is collected into a large fund managed by the insurer from many people (the insured) topay loss to the few who actually incur them.There is always a risk for us to lose something (e.g. Fire on house, car damaged, and life lost) that is worth a lot interms of monetary loss; buying insurance may allow us to minimize our losses.
(b)Principle of Indemnity.
No person can or should make a profit on an insurance claim as this would constitute fraud. Indemnity is amechanism by which the insurers provide compensation in an attempt to place the insured in a position no worseor better off than he was before.
A type of life insurance plan which allows the life assured to invest their premium by purchasing units inprofessionally managed investment funds (unit trust) while providing guaranteed insurance coverage for death andtotal and permanent disability (insurance). It is commonly call an investment linked policy.
Andy Kwok suffered from acute asthma attacks as a child. Two years ago, he bought a lifeinsurance policy with medical benefits attached but failed to mention his history of asthmasince he had not had an attack in the last 10 years. He was recently hospitalised due toan asthma attack.(a)State and explain the principle of insurance applicable to the case. Do you thinkthe insurance company was liable?
In insurance contracts, a potential buyer of a policy knows certain information which the insurer may never know.The law thus imposes a duty of utmost good faith on the parties to an insurance contract. It is important that thebuyer disclose such information which may affect judgment of the insurer whether or not to accept the risk.In this case, the insurance company may deny liability as andy kwok had failed to make full disclosure of amaterial fact (history of asthma)
(b)If Andy Kwok had earlier disclosed his asthma history, would the insurancecompany have sold the policy to him?
Charged a higher premium, don’t sell the contract or exclude asthma related ailments from being covered.
Insurance and Reinsurance1