9/15/2018

TOPIC 5. GENERAL INSURANCE

Lecturer: Nguyen Xuan Tiep, M.S.

CONNECTION

Health and
•Liabilities, & accident insurance •Term life
•properties inssurance •Permanent products
•Accident insurance •Endowment products
products
•Annuitties
•Health care pruducts
•Retirement plan

Non – life
Life insurance
insurance

CO N N E C T I O N

Employer
Private/Personal Provided
Insurance Insurance/
Employee
Benefits

Social Insurance

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Disability Ins., and

workers’
Compensation
Special
Terrorism
Liability Ins.
Endorsement

Global Risk E-commerce Car Accident Terrorism

Risk Risk Risk
Injury Risk Liability Risk Death Risk Disable Risk Fire Risk

Illness Risk “Living Too Weather Investment Risk

Long” Risk Catastrophe Risk

Health Homeowner,
Ins., Auto, Fire,
[Link] Ins.
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Business
Property Ins.

CONTENT
1. Introduction
2. Principles are applied in general insurance
3. General Insurance products
4. General insurance market

1. INTRODUCTION
1.1. Features of general insurance
 Short-term insurance: the duration is
maximized one year
 protects for property and liability losses
 Gives a protection only
 Is called damage insurance
 Can determine the insured value

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2. PRINCIPLES ARE APPLIED IN GENERAL

INSURANCE

Principles apply in general insurance:

 Indemnity

 Subrogation

 Contribution

2. PRINCIPLES ARE APPLIED IN

GENERAL INSURANCE
2.1. Indemnity
 There is a link between indemnity and
insurable interest
 Indemnity - for the purposes of insurance
contracts, may be looked on as exact
financial position after a loss as
immediately before it occurred.

2. PR I N C I P L E S A R E A P P L I E D
IN GENERAL INSURANCE
2.1. Indemnity
 Benefit policies: in cases of personal
accident and sickness, or life insurance
 Ex-gratia payments: for the sake of
goodwill, insurers make a payment even if
on the basis of strict liability they need
not.
 How indemnity is provided: cash
payment, replacement or repair. In fact,
indemnity is provided by cash. 9

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2. PRINCIPLES ARE APPLIED IN

GENERAL INSURANCE
2.1. Indemnity
 Average:
 indemnity bases on ratio between the real value
and insured value
 Applies in cases of underinsurance

Payment = loss x sum insured/value of goods at risk)

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2. PR I N C I P L E S A R E A P P L I E D
IN GENERAL INSURANCE
2.1. Indemnity
 Excess: Is a amount of each and every claim which
is not covered by the policy. The amount of the
excess is deducted from each and every claim.
 Franchise: Is designed to cater for certain small
losses. Once the franchise has been exceeded, the
claim is payable in full.
 Deductible: Is the name given to a very large excess

 Limits: Many policies limit the amount to be paid

for certain events by the warding of the policy
itself.
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2. PRINCIPLES ARE APPLIED IN

GENERAL INSURANCE
2.2. Subrogation
 Is the right of one person, having indemnified
another under a legal obligation to do so, to stand
in the place of that other and avail himself of all
the rights and remedies of that one, whether
already enforced or not.
 Applies when there is a third party, who make
losses

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2. PR I N C I P L E S ARE
APPLIED IN GENERAL
INSURANCE
2.3. Contribution
 Is the right of an insurer to call upon others
similarly, but not necessarily equally liable to the
same insured, to share the cost of an indemnity
payment
 There are five requirements before contribution
will arise:
 Two or more policies of indemnity must exist;
 The policies must cover a common interest;
 The policies must cover a common peril which gives
rise to the loss
 The policies must cover a common subject matter;
 Each policy must be liable for the loss. 13

2. PRINCIPLES ARE APPLIED IN

GENERAL INSURANCE
2.3. Contribution
 The basis of contribution: ratable proportion
 Non-contribution policies: this policy shall not
apply in respect of any claim where the insured is
entitled to indemnity under any other insurance.

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3. GE N E R A L I N S U R A N C E P R O D U C T S
3.1. Property insurance products (pp.251-259;
271-276):
 car policy;
 fire policy;
 Construction policy;
 Erection policy;
 Electronic policy;
 Marine policy: Hull policy, cargo policy, P&I
 Home care policy;
 Etc.

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3. GENERAL INSURANCE PRODUCTS

 Car Insurance – Auto Insurance:
 Insurable subject: Car (private and business)
 Insurance duration: 1 year
 Coverage:
 Part 1: Property damage (damage of car)
 Part 2: Liability (liability to third party, liability to passengers,
liability to goods in transaction).
 Part 3: Personal accident (driver, persons in the car)

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3. GE N E R A L I N S U R A N C E P R O D U C T S
 Coverage: property damage (damage of car):
 Insured risks:
 Natural hazards
 Accidents
 Fire and explosion

 Stolen (excludes partial stolen)

 Other contingency accidents

 Premium:

P=f+d P: premium
f: net premium
d: operation and other expenses (sub premium)
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3. GENERAL INSURANCE PRODUCTS

 Coverage: third party liability insurance
 The insurer indemnifies for the liability of the insured to the
third party.
 The insurer usually give a limit of indemnity per risk (accident)
 The third party: who is/are damaged in an accident by the
insured car.
 Damage of the third party includes property and/or personal
damages.
 Damages are caused by an accident by the insured car.

Liability = mistake of the insured x damages of the third party

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3. GE N E R A L I N S U R A N C E P R O D U C T S
 Coverage: Personal accident
 The insurer pays for personal injury or dead which
caused by accident when they in the insured car.

 Have two coverage:

 Driver accident; and
 Passenger accident

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3. GENERAL INSURANCE PRODUCTS

 Exclusions:
 Damages caused by intentional act from the insured
 Act of non-compliance with the law
 Damages are not caused by accident or natural
hazards
 …

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3. GE N E R A L I N S U R A N C E P R O D U C T S
 Indemnity:
 Property damage: based on the principle of indemnity
 Liability damage: indemnify the insured’s liability
but is not over the liability limit.
 Personal damage: based on the table of payment for
personal accident.

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3. GENERAL INSURANCE PRODUCTS

 Example 1: In an accident:
Car A: property damage: damage of the car: 45 mil. VND,
business damage: 12 mil. VND.
Car B: property damage: damage of the car: 22 mil. VND,
business damage: 9 mil. VND.
Mistake of parties: A: 40%; B: 60%
Both cars are insured (property and third party liability
insurances: (liability limit: 70 mil./risk/property and 70
mil./risk/person)); at time of accident: the insurance policies
are in force.
Two cars bought insurance from different insurers.
 Requirement: calculate the indemnity of the
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insurers to the insureds.

3. GE N E R A L I N S U R A N C E P R O D U C T S
 Example 2: In an accident:
Car A: property damage: damage of the car: 32 mil. VND,
business damage: 6 mil. VND. Driver is injury: Medicare
cost: 15 mil. VND and income lost: 8 mil. VND.
Car B: property damage: damage of the car: 28 mil. VND,
business damage: 15 mil. VND.
Mistake of parties: A: 50%; B: 50%
Both cars are insured (property and third party liability
insurances); at time of accident: the insurance policies are
in force. (liability limit: 70 mil./risk/property and 70
mil./risk/person)
Two cars bought insurance from different insurers.
 Requirement: calculate the indemnity of the
insurers to the insureds. 23

3. GENERAL INSURANCE PRODUCTS

 Example 3: In an accident:
 Car A is fired and totally damaged
 Car is insured (property and third party liability
insurances (liability limitations: 70 mil./risk/property and
70 mil./risk/person); At time of accident: the insurance
policy is in force for 5 months.
 Depreciation of the car is 5%/year
 Insured valued: 600 mil. VND

 Requirement: calculate the indemnity from the

insurer to the insured.

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3. GE N E R A L I N S U R A N C E P R O D U C T S
 Example 4: In an accident:
 The insured car is fired and totally damaged
 Car is insured (property and third party liability
insurances: (liability limitations: 50 mil./risk/property
and 50 mil./risk/person); at time of accident: the
insurance policy is in force for 8 months.
 Depreciation of the car is 5%/year
 Insured valued: 800 mil. VND;

 Requirement: calculate the indemnity from the

insurers to the insureds.

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3. GENERAL INSURANCE PRODUCTS

3.2. Liability insurance products (pp.264-271):
 Common liability policy;
 Workmen policy (workmen compensation policy);

 Pollution liability policy;

 Job liability policy;

 Product liability policy;

 Etc.

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3. GENERAL INSURANCE PRODUCTS

3.2. Liability insurance products (cont.)
 Forms of liabilities:
 Personal liability: arises from incidents that occur in
our private, non-business related, activities and
which involve third party injury or property damage.
 Commercial liability: arises from incidents that occur
in our business related, activities and which involve
third party injury or property damage.

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3. GENERAL INSURANCE PRODUCTS

3.2. Liability insurance products (cont.)
 The legal system
 Civil law systems, which emphasize a complete code
of written law. The written law is created by
parliament and s referred to as status law.
 Common law systems, which arise from the decision
making of judges

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3. GENERAL INSURANCE PRODUCTS

3.2. Liability insurance products (cont.)
 Tort
 A tort can be defined as a civil wrong. It is an act or
omission of a person, without just cause or excuse,
which causes some form of harm to the person or
property of another.
 Tort law
 The law or torts (or tort liability) exists to
compensate the person injured by a wrongdoer when
the person injured and the wrong-doer are not in a
contractual relationship.
 Negligence – the main area of tort law and claims 29

3. GENERAL INSURANCE PRODUCTS

3.2. Liability insurance products (cont.)
 Quantifying liability:
 Damage may be awarded in respect to a wide of
matters, for example:
 Personal injury or death
 Damage to property
 Consequential financial loss

 Damage to reputation

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3. GENERAL INSURANCE PRODUCTS

3.2. Liability insurance products (cont.)
 Cover:
 Personal liability
 Public liability
 Products liability
 Product recall liability
 Professional indemnity liability
 Contract works – contraction liability
 Medical malpractice liability

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3. GENERAL INSURANCE PRODUCTS

3.2. Liability insurance products (cont.)
 Claim occurring
 Limit of indemnity
 Will mean that the limit of indemnity applies, in full,
to each claim that occurs during the period of cover,
regardless of how many claims occur during the
period of cover.

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3. GE N E R A L I N S U R A N C E
PRODUCTS

3.2. Liability insurance products (cont.)

 Exclusions
 Penalties, fines or awards of damages
 Damage caused to the insured’s or family’s property
 Personal injury to the insured and members of the
family
 Agreements or contracts importing liability that
would not otherwise have attached.
 Cover which is available under another class of
insurance, e.g. employer’s liability/vehicle, products
recall, professional liabilities, aircraft, ….
 … 33

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3. GENERAL INSURANCE PRODUCTS

3.2. Liability insurance products (cont.)
 Policy conditions:
 At the outset before entering into the contract
 During the period of insurance, and
 Following a claim

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3. GE N E R A L I N S U R A N C E
PRODUCTS

3.2. Liability insurance products (cont.)

 Policy endorsements:
 To expand, or
 Restrict
the cover granted in the original base document.

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3. GENERAL INSURANCE PRODUCTS

3.3 General Insurance Policy:
 The content of a general insurance policy:
 Coverage
 Exclusions
 Policy conditions
 Endorsements
 Appendix
 Named risk policy vs. All risk policy
 Narrow coverage vs. large coverage
 Package policy
 A policy includes different types of insurance to protect
for one insured
 Low premium 36
 Low deductible

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4. GE N E R A L I N S U R A N C E M A R K E T :
U N D E RW R IT IN G C Y C L E

P. Rates rise
Terms and conditions
tighten
upswing
Lower limits
Hard

Insurer make profits

Insurers suffer losses
Insurers desire larger
Capital exits
market share
Supply contracts
Competition increases

soft Premium rates fall

downswing
Terms and
conditions relaxed
Higher limits 37

4. GENERAL INSURANCE MARKET:

STRUCTURE OF THE GENERAL INSURANCE INDUSTRY

Regulators and industry bodies

insurers reinsurers

Agents/underwriting
brokers
agencies
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4. GENERAL INSURANCE MARKET

 Regulators and industry bodies
 Insurers
 Reinsurers

 Brokers

 Agent/underwriting agencies

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4. GENERAL INSURANCE MARKET

 Reinsurance
 Facultative reinsurance: reinsurance provides automatic
protection to a pre-agreed book of

 Obligatory treaty reinsurance: contracts are placed on a risk-by-

risk basis and are typically individually underwritten by
reinsurers.

 Existence of an intermediary form (FacOb) for which the

Insurer has the possibility to cede or not and the reinsurer has
to accepts all the business which is ceded under pre-defined
conditions. 40

GENERAL INSURANCE MARKET

 Reinsurance methods:
 Proportional reinsurance: the reinsurer agrees to bear
a fixed proportion of any losses arising, in
exchange for a fixed proportion of the underlying
premium. Types of prop. Reins. : quota share vs.
Surplus.
 Non-proportional reinsurance: the reinsurer agrees to
meet any losses above a pre-agreed level, in return
for a fixed premium, not anymore proportional.
Types of non-prop. Reins.: excess of loss/stop loss

(Examples: John Teale, 2008, pp. 172-175) 41

ES OF REINSURANCERANCTE
REINSURANCE

OBLIGATORY FACOB FACULTATIVE

NON NON
PROPORTIONAL PROPORTIONAL
PRPORTIONA PROPORTIONA
L L

QUOTA SHARE RISK XL

SURPLUS EVENT XL

STOP LOSS

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PROPORTIONAL REINSURANCE
Quota Share Treaty
Example : Q/S cession 75% with a 30% Commission
€150,000 Policy

€100,000 Policy
Split of a € 10m Loss
Net cost for the Insurer € 2,5m €50,000 Policy 25% 75%
Recovery from the Reinsurance € 7,5m 25% 75%
25% 75%

Premium 50 000 100 000 150 000

Retention Insurer (25%) 12 500 25 000 37 500
Cession to Reinsurer (75%) 37 500 75 000 112 500
Commission (30%) paid by reinsurer to insurer 11 250 22 500 33 750
Net premium retained by Insurer 23 750 47 500 71 250
Net premium paid to reinsurer 26 250 52 500 78 750

+ : Simple to rate & administer / Can help reduce reported expenses

- : Do not stabilize underwriting results / Can cede profitable business

PROPORTIONAL REINSURANCE
Surplus Treaty
Example
Surplus 5 lines of €4 m
Used when the
5 Variable % of cession cedant want to
to reinsurers reduce Its
4 exposure to
83,33% the larger
3 risks
The level of
2 commission
66,67%
is a key
1 0% parameter
for this type
Retention of treaty
€4m 100,00% 33,33% 16,67%

Size of risk (€ millions) 3 12 24

EXAMPLES

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CHARACTERISTICS OF PROPORTIONAL
REINSURANCE

 Reinsurance Commission
 Contribution of the Reinsurer to cover part of the costs supported by the
Insurer (acquisition, administration)
 Fix or sliding scale between a max and a min depending of the final loss
ratio

Example of Sliding scale Loss ratio (%) Com (%)

over 60 30
58,1 to 60 31
56,1 to 58 32
54,1 tgo 56 33
52,1 to 54 34
below 52 35

 Participation to the benefit

 Contribution to the benefit of the treaty. To be fair, this clause is normally
mentioning the report of potential losses over the previous years (3 to 4
years)
 Normally used in conjunction with fix Commission

NON- PROPORTIONAL REINSURANCE

PER RISK XL
15

Layer 5 XS 10 Part of losses

paid by
reinsurers of
Amount of Loss

10 layer 10xs5

Layer 5 XS 5 Part of losses

paid by
reinsurers of
5 layer 5xs5

Part of losses
retained by
cedant
0

Losses

 Designed to exclude small losses.

 Less premium submitted to reinsurer
 Helps to stabilize loss experience

NO N PR O P O R T I O N A L R E I N S U R A N C E
XL P E R E V E N T T R E A T Y
40

Example 35

Cat XL 20 XS 20 Reinsurance
30 contribution
€19m
Overall claim
amount for the 25

Event €39m
4+8+2+12+7+6 =39 20

15
15
Amount of Loss

10
10
Retention
€20m
5
5

0 0
1 2 3 4 5 6
Losses

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Combination of XL per risk and XL per event

NON PROPORTIONAL REINSURANCE
40

Example
Per risk XL 10xs5
35
inuring to the
benefit of Per event
XL 20xs20 20xs20 30

€ 6m
Overall claim amount for the event = € 25
recovery
39m Overall recovery from reinsurance = from per
€19m event
€ 13m from per risk + € 6m from per event 20
reinsurance
cover
15
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Amount of Loss

€13m recovery
10
from per risk 10
Retention
Retention

reinsurance € 20m
5 cover 5

0
1 2 3 4 5 6 Cumulated €26m 0
Losses

NON PROPORTIONAL REINSURANCE:

STOP LOSS
40

Same principle as for Cat XL but Example

instead of considering only a Annual Stop Loss 20 XS 20
35
specific event, losses are
cumulated over a given period
(usually a year) 30 Reinsuranc
Overall claim e
amount during the 25 contributio
year n
€ 39m €19m
20

4+8+2+12+7+6 =39
15
15
Amount of Loss

10
10 Retention €20m

5
5

0
4 5 0
1 2 3 6
Losses

FACULTATIVE REINSURANCE
FACULTATIVE R E T E N
TION
TREATY

FAC
TREATY

RETENTION

XS FAC QS FAC

 Cession mode : Quota share or Excess

 Pro Rata
- Functions similarly to quota share treaty.
 Excess
- Operates like per risk excess of loss (XL) treaty.
 Reinsurer underwrites each loss exposure individually as
submitted with detailed information
 Reasons for Facultative Reinsurance
 Addresses exclusions and limits in reinsurance treaties.
 Used to “protect” reinsurance treaties
 Obtain second opinion of reinsurer

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4. GENERAL INSURANCE MARKET

 General insurance market be effected by:
 The development of the economy
 Risk conditions
 General insurance market in Vietnam:
 Number of enterprises
 Diversification of products
 Distribution channels

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