Page 31 - CFPA-SCR-Award in General Insurance W01_2018-19_Neat

Chapter 1 Risk and insurance 1/13 Chapter

H Benefits of insurance 1

Insurance brings many benefits to policyholders and to society as a whole. We have already mentioned
the peace of mind that it can provide, and how it enables the risk of financial loss to be transferred.
There are other benefits too:

Insurance releases capital within In the absence of insurance large sums would need to be built up and
companies that can be used in the business set aside to cater for unforeseen contingencies, such as fire, flood or
liabilities.
Enterprises are encouraged to start or In their early years companies are particularly vulnerable to loss, and
expand this may inhibit an entrepreneurial approach in, say, opening up a
factory or launching a new product. Insurance provides security from
which to develop such innovations.

Employees are kept in work This is a great social benefit of insurance. Whenever there is an
insured occurrence at a location there will be physical damage, but
often the company will also lose turnover until its trading position is
restored. Insurance can also cover wages, salaries and the loss of
trading income for the period during which the business is recovering.
This in turn ensures that jobs are maintained.
Losses are reduced in size and number The overall cost to the community of all damage by fire in a year is
called ‘fire waste’ and insurers are keen to minimise this. Every fire
prevented is a claim that does not need to be paid and a business that
can continue trading without disruption. For larger risks insurers use
the services of surveyors, who assess the risk for the underwriter,
estimate the loss potential and recommend improvements designed to
reduce the incidence of fires or their effect.

The nation benefits from the investments This arises in two main ways:
made by insurers
• There is a time delay between the receipt of premiums and the
occurrence of claims. This creates a premium reserve.
• Once claims have been made there is a further period (which can
be very extensive for those involving personal injury or illness)
before the claims are actually paid. This element is a claims
reserve.

At any one time insurers will have substantial sums of money in these reserves to invest in a wide range
of areas, including property and equities.

I Risk sharing

Part of an insurer’s job is to manage the pool of money valid claims are to be paid from. Each insurer
will, therefore, decide upon the maximum limits of acceptance for particular categories of risk. For
property insurances this will probably be a range of acceptance limits, depending upon the trade being
carried on in the premises and usually linked to different construction standards. For example, an
insurer will be comfortable accepting a higher sum insured for an office than for a plant where plastics
are manufactured.

So what happens when a risk is offered to an insurer but the amount at risk is greater than the insurer’s
retention limits for that category? The insurer has the option of declining to insure the risk, but it will not
wish to do this if the only reason is size and in all other respects the risk is of good quality.
The insurer must find a way of sharing the risk with others and there are two principal ways of doing this:
co-insurance and reinsurance. We will look at reinsurance in chapter 2. There is further risk sharing
method that insurers occasionally use: coming together to form a pool and agreeing to jointly underwrite
particular risks. These are usually designed to cover catastrophic risks such as terrorism or earthquakes.