IIQE Paper 3 English Quiz 25

A material fact is legally defined as ‘every circumstance which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will accept the risk’. It includes what to disclose, non-medical application, medical application, medical tests and beach of the duty on the part of the policyowner.

In medical tests, the insurer’s requests to supplement the information supplied verbally with reasonable medical examinations or tests are normally met. Great care must be taken not to breach the Personal Data (Privacy) Ordinance, which has the effect of requiring insurers to explain the need for gathering information before any testing takes place. The subject of the tests also has the right under that Ordinance to be told their results.

Uninsured perils is the events for which insurance coverage is not available or for which insurers are unlikely to underwrite policies. Nonlife policies may specify the perils which are covered, and one of those must be the proximate cause of the loss or it is irrecoverable.

In endowment insurance, the plan is a combination of term insurance and a pure endowment for equal amounts. (A pure endowment is a contract under which the death benefit is only payable if the life insured survives the term).

Non-medical application
If the insurance is arranged without a physical examination of the applicant, the insurer will normally have great difficulty alleging non-disclosure of a material fact not covered by questions on the application or the personal physician’s form.

The pure endowment is a type of life insurance policy in which an insurance company agrees to pay the insured a certain amount of money if the insured is still alive at the end of a specific time period. The amount is paid on maturity of the policy in a single installment as a lump sum. An amount of money that is payable at the end of an endowment’s policy period if the insured is alive.

If the insurance is arranged with a physical examination of the applicant, the insurer cannot hold against the applicant negligent omissions or mis-diagnosing by the medically qualified person concerned.

In the first of an excellent series of textbooks produced by the U.S. Life Office Management Association Inc. (LOMA), life insurance (or ‘life assurance’ in British terminology) is defined as follows:
“Life insurance provides a sum of money if the person who is insured dies whilst the policy is in effect.”

Incontestability Provision states that the insurer will not contest the policy after it has been in force for a specified period (contestable period) unless there is proof of fraud on the part of the policyowner. Once the policy has been in force for a certain length of time the insurer cannot dispute the validity of the contract. Under a normal market, practice plans cannot usually be contested once they have been in force for a period of 2 or more years.

Breach of the duty on the part of the policyowner
At law, a breach of utmost good faith renders the contract voidable by the insurer. But with most life policies in Hong Kong, regard has to be taken of a policy condition known as an Incontestability Provision, which states that the insurer will not contest the policy after it has been in force for a specified period (contestable period) unless there is proof of fraud on the part of the policyowner.

Life insurance premium
The life insurance premium is required for ensuring a given life may have to take into account individual features which make the risk better or worse than the average for a person of that age and sex.

The owner of a participating policy is entitled to receive a varying share of (or to participate in) the divisible surplus, if any, of the insurer, normally on the policy anniversary dates. Such proceeds are termed policy dividends or dividends. Though no policy dividends are guaranteed, participating policies are subject to higher premium rates than equivalent Non-Participating policies.

Longer-term consequences, in hindsight, were very predictable. It includes:

Increasing premiums with increasing age and, in later years, decreasing disposable resources or earning power of the policyowner, often presented real problems with the continuation of insurance.

The system was vulnerable to anti-selection, whereby the better risks – those in good health and with real prospects of a long life – dropped out of the scheme as it became more expensive, and the bad risks would normally decide to continue, for obvious reasons.

Life insurance premiums should be adequate so that the insurer will have money to pay the benefit and meet other obligations under the contract.

To achieve the criteria, a number of factors must be taken into account in the course of rating. The three basic factors includes mortality, interest, and expenses.

Life insurance premiums should be equitable (fair) so that each policyowner is paying an amount in line with the risk and contracted benefits.

Perhaps more accurately phrased as the Rate of Mortality, this indicates the rate at which insured lives are expected to die. Whilst this sounds very morbid, it will be immediately obvious that this is absolutely at the heart of life insurance premium calculation. To know, on average, when the life to be insured may be expected to die is a crucial factor in determining the correct premium to charge.

Pure premium is the money required to be collected from the policyholders just to meet death claims arising in the future under normal statistical expectations. It is determined by actuarial studies, consists of that part of the premium necessary to pay for losses and loss-related expenses. It represents payments to cover claims made on the underwritten policies of insurance companies.

According to insurers, loading is an additional cost built into the insurance policy to cover losses that are higher than anticipated for the company arising from insuring a person who is prone to a form of risk. Loading is the part of the premium necessary to cover other expenses, particularly sales expenses, and to allow for a profit.

In the expenses, the net premium has to be subject to a loading (surcharge or additional sum) to take care of all expected and probable expenses. These will include all internal operating costs, commissions, tax and overheads to which any business is subject. Loading the net premium will include an amount to cover that kind of contingency.

According to insurers, loading is an additional cost built into the insurance policy to cover losses that are higher than anticipated for the company arising from insuring a person who is prone to a form of risk. The loading added to the net premium produces the gross premium, which takes into account all three basic factors.

Other factors which may arise from time to time can only affect premiums for new policies. Some of the influences which might have an effect on life premium rating. It includes:
• PAR or NON-PAR
• Public health
• Competition
• Economic changes
• Fiscal changes
• Company objectives and marketing strategies

Company objectives and marketing strategies state that if a company is determined to increase its market share, the competitive premium rating is surely one of the possible marketing strategies.

One of the factors that may arise from time to time that can only affect premiums for new policies is competition. In competition, no insurer enjoys a monopoly position and what the market is charging cannot be ignored.

In economic changes, extended times of affluence or recession will doubtlessly have an impact on all product prices, including insurance.

Policy dividends or dividends amount often depends on the amount of money paid into the policy. The amount it will received will be based on the performance of the company’s financials, based on interest rates, investment returns, and new policies sold. It can be distributed as cash, to purchase additional paid-up insurance, or to reduce premiums due.

Fiscal changes
Fiscal changes refer to a lasting increase in tax levels that must be reflected in higher premium rates.

Term insurance
It is a type of life insurance policy that provides coverage for a certain period of time or a specified “term” of years.

The natural premium system is the amount required to meet the mortality cost of life insurance for each particular year and increases from year to year for any given unit of protection. It was used by some life insurers in the early days of the business. It was very logical, but it was doomed to failure because of its built-in features which virtually guaranteed that it could not work long-term in practice.

The natural premium system is the amount required to meet the mortality cost of life insurance for each particular year and increases from year to year for any given unit of protection. The features of natural premium (pricing) system includes premiums, short-term consequences, present-day, and longer-term consequences.