“Working together for a skilled tomorrow”

National Certificate in Insurance Administration

NQF Level 3

Unit Standard 8989: Describe short term insurance in South Africa.

Credits: 2 Notional Hours of Learning: 20

Learner Material

This outcomes-based learning material was developed by IISA with funding from INSETA in March 2003.

The material is generic in nature.

It’s purpose is to serve as a guide for the further development and customization of company-specific, learner-specific

and situation-specific learning interventions.

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Contents

Topic Page

Unit Standard ...........................................................................................................................3

Learner material ...........................................................................................................................6

Instructions .........................................................................................................6

Process/Activities ..............................................................................................7

Examples: Guide for Assessment of Portfolio ................................................12

Additional Notes/Resources .......................................................................................................14

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1. TITLE: Describe short term insurance in South Africa

2. UNIT STANDARD NUMBER: 8989 3. LEVEL ON NQF: 3 4. CREDITS: 2 5. FIELD: Business, Commerce and Management Studies

SUB FIELD: Finance, Economics and Accounting 6. ISSUE DATE: 7. REVIEW DATE: 8. PURPOSE:

This unit standard introduces the basic concepts of short term insurance and provides a broad introduction to short term insurance. The qualifying learner is capable of: Knowing and understanding the concept of short term insurance. Identifying different products that a short term insurance organisation/provider markets. Categorising the different types of short term insurance. Recognising events that impact on short term insurance. Applying knowledge of customer profiles and risk to short term insurance. Asking questions to obtain information.

9. LEARNING ASSUMED TO BE IN PLACE:

There is open access to this unit standard. Learners should be competent in Communication and Mathematical literacy at Level 2.

10. SPECIFIC OUTCOMES AND ASSESSMENT CRITERIA: SO Description Assessment Criteria 1. Know and explain the concept

of short term insurance. 1.1 The concept of insuring for a fortuitous event is understood

and examples are used to illustrate the concept. 1.2 The concept of different insurance needs at different times in a

person’s life is illustrated on a time line. 1.3 The possibility of needing insurance is compared for three

different events. 1.4 Basic terms associated with short term insurance such as

insurable interest and indemnity are understood and explained with reference to a specific policy.

1.5 The advantages and disadvantages of short term insurance are listed from the point of view of a policy holder.

1.7 The effects of a particular event on a short term insurance organisation are compared for a scenario with or without reinsurance.

1.8 The implication of non-disclosure for the individual and the organisation are explained for short term insurance.

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2. Identify the different products that a short term insurance organisation/provider markets

2.1 Five different short term insurance products are named with examples of each.

2.2 The excess on different products is compared based on the risk and characteristics of the product.

2.3 The benefits of products are compared with reference to policies.

2.4 The concept of outsurance is compared to that of traditional short term insurance and a decision is made as to which type of insurance best suits own circumstances.

3. Categorise the different types

of short term insurance 3.1 The basis for the classification of a short term policy is

indicated according to its target market. 3.2 The type of risk in two short term policies is compared and

reasons are given for the difference in risk. 3.3 The classes applied to short term insurance are named with an

example of each type of insurance. 3.4 Two examples of specialist categories of short term insurance

are listed with examples of each type of insurance.

4. Recognise events that impact on short term insurance

4.1 The impact of location, circumstances and claims history on policy premiums is explained with reference to actual examples.

4.2 The frequency of claims is explained in terms of nature of risk with reference to a claims statistics report.

4.3 The concept of size of risk is explained using a graph to illustrate the underlying principles.

4.4 A peril is explained with reference to difference classes of insurance.

5. Apply knowledge of customer

profiles and risk to short term insurance

5.1 Various consumer profiles are established and compared using a case study.

5.2 The risk categories most likely to apply to the customers in the case study are identified and linked to the customer profile.

5.3 The advantages and disadvantages of taking out short term insurance are compared with examples from case studies involving self insurance and insurance.

5.5 A table is compiled that indicates the most typical customer profiles and the types of insurance cover best suited to their needs.

11. ACCREDITATION AND MODERATION: This unit standard will be internally assessed by the provider and moderated by a moderator registered by INSQA or a relevant accredited ETQA. The mechanisms and requirements for moderation are contained in the document obtainable from INSQA, INSQA framework for assessment and moderation. 12. RANGE STATEMENT: The typical scope of this unit standard is

1. Target market: personal lines, corporate and commercial. 2. Insurance classes:

Fire or Interruption, Engineering, Liability, Motor, Transit, Marine, Breakdown,

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Personal Accident, Professional Indemnity, Aviation, Crime Classes etc.

3. Specialist categories: marine, aviation and engineering. 13. NOTES: CRITICAL CROSS-FIELD and DEVELOPMENTAL OUTCOMES: This unit standard supports in particular, the following critical cross field outcomes at unit standard level: 1. Learners can identify and solve problems by comparing the need for insurance, by explaining the

implications of nondisclosure and by matching the customer’s profile to short term insurance classes of business.

2. Learners can collect, organise and evaluate information when comparing the risk element of 2 short term policies and by giving reasons for the differences in risk.

3. Learners can communicate effectively using visual, mathematics and language skills when using case studies of customer profiles and when graphically presenting their findings.

4. Learners are able to demonstrate an understanding of the world as a set of related systems when comparing the effects of a particular event on a short term insurance organisation for a scenario with or without reinsurance.

5. A learner is able to participate as a responsible citizen in his/her work community when explaining the implications of non-disclosure for the individual and the organisation.

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INSTRUCTIONS

This task will require 20 hours of reading, research and response by you. Your notes, summaries, written feedback, and transcribed oral feedback (where applicable)

must be collected and stored in a portfolio. The portfolio can be a flip file, scrapbook or exercise book. Each article / notes or summary should be neatly pasted, dated and headed “Specific

Outcome 1, 2, 3, or 4” depending on what aspect it covers. Your portfolio will be assessed at the end of the period. You should have regular contact and discussion sessions with your trainer / facilitator.

During these sessions the progress of your portfolio will be checked. Should you live in a rural / distant area, your contact session can be telephonic / via fax or via e-mail.

At these contact sessions you will be asked to comment on some of the articles you selected and this oral input will form part of your assessment for this unit standard.

After three months you will also need to fill in a questionnaire as part of the assessment of this unit standard.

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ACTIVITIES Number

Aspect of task Done

Specific Outcome 1: Know and explain the concept of short term insurance Action 1

The concept of insuring for a fortuitous event is understood and examples are used to explain this concept. (Note: Fortuitous means " happening by accident or chance" Readers Digest Great Illustrated Dictionary) Contact the SA Insurance Association (www.sainsurance.co.za) and/ or a qualified insurance broker or someone who works in an insurance company and ask the following questions; A What is the meaning and implications of the word “term” as

it is used in the phrase “short term” insurance?

Discuss the meaning implication of the "term" above in your study/syndicate group. When you have agreed on the meaning write it down along with the reply given to you by your information source/s together with the outcome of the above activity. What if you are not working in a group?

B What examples can the broker give of his/her past clients

that have benefited from having bought short-term insurance? Write down the details of one of the examples given to you.

Specific Outcome 1: Action 2

The concept of different needs at different times in a person’s life on a time line. Ask your information source to explain to you how peoples’ short term insurance needs, change at different times in their lives. Record his/her reply along a time-line which begins at the time a person starts working, to the time of death.

Specific Outcome 1: Action 3

The possibility of needing insurance is compared for three different events. Describe 3 of the factors that could influence a customer’s short term insurance needs at different stages of his life, after discussing this in your study/syndicate group. Write down these factors.

Specific Outcome 1: Action 4

Basic terms associated with short term insurance such as insurable interest and indemnity are understood and explained with reference to a specific policy. Contact the SA Insurance Association (www.sainsurance.co.za) and /or a senior person the in the Claims Division of a short –term insurance company and ask them the following question What are the meanings of the terms “insurable interest” and “indemnity” in the context of short-term insurance? Discuss these concepts in your study/syndicate group and write down what the group agrees on.

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Number

Aspect of task Done

Specific Outcome 1: Action 5

The advantages and disadvantages of short term insurance are listed from the point of view of the policyholder. Conduct personal interviews with five policyholders and get their views of the advantages and disadvantages of short term insurance. Discuss your findings in your study/syndicate group and write down what you learnt from this.

Specific Outcome 1: Action 6

The effects of a particular event on a short term insurance organisation are compared for a scenario with or without reinsurance. Contact the SA Special Risks Association (www.sasria.co.za) and /or a senior person in the Claims Division of a short-term insurance company and ask them to explain the effects on the short-term insurer, when a fire burns down a large factory it has insured. Pay particular attention to the effects of re-insurance/lack of re-insurance on the specific insurer. Write down the answer in full and add it to your portfolio.

Specific Outcome 1: Action 7

The implication of non-disclosure for the individual and the organisation are explained for short term insurance. Contact a qualified short term insurance broker and/or a senior person the Claims Division of a short-term insurer and ask what happens if a policyholder does not disclose all the necessary information needed by the insurer when applying for a short term insurance policy. Discuss their responses in your study/syndicate group and then write down the explanations.

Specific Outcome 2: Identify the different products that a short term insurance organisation/provider markets. Action 8

Five different short term insurance products are named with examples of each. Contact a senior person in the marketing department of a short-term insurer and ask them to list the different short-term products they offer, with an example of each product. Discuss these in your study/syndicate group and write down five products.

Specific Outcome 2: Action 9

The excesses on different products are compared based on the risk and characteristics of the product. Contact a senior person in the HR division of any government department and ask them to describe the short-term insurance offered to state employees. Record the information. Record these. (What has this got to do with this s/o?) Contact a senior person in the Claims department of a Short term insurer and compare the excesses on their products based on the risk and characteristics of the products. Discuss your findings in your study/syndicate group and record the various excesses.

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Number

Aspect of task Done

Specific Outcome 2: Action 10

The benefits of products are compared with reference to policies. Contact a qualified short-term insurance broker and ask him/her to compare the benefits of the various policies he/she markets.

Specific Outcome 3:

Categorise the different types of short term insurance Action 11

The basis for the classification of a short term policy is indicated according to its target market. Contact a senior person in the marketing department of a short-term insurance company and ask him/her to explain how a short-term policy is classified according to its target market. Discuss the responses in your/study group and write down the explanation.

Specific Outcome 3: Action 12

The risk type in two short term policies is compared and reasons are given for the difference in risk.

Specific Outcome 3: Action 13

Contact the SA Special Risks Association (www.sasria.co.za) and/or a senior person in the claims department of a short term insurance company and ask why the risk type for a company which owns its factory premises is different from that for a similar company which leases its factory premises. Discuss this in your study/syndicate group and write down the explanation.

Specific Outcome 3: Action 14

The broad classes applied to short term insurance are named with an example of each type of insurance. Contact the SA Insurance Association (sainsurnace.co.za) and/or a senior person in the claims department of a short term insurance company and ask him/her to name the broad classes applied to short term insurance. Also obtain an example of the policy document for each type of insurance. Discuss the examples in your study/syndicate group and record them.

Specific Outcome 3: Action 15

Two examples of specialist categories of short term insurance are listed with examples of each type of insurance. Contact a qualified short term insurance broker and/or a senior person in the claims department of a short term insurance department and ask him/her to give two examples of specialist categories of short term insurance, with examples of each. Discuss these with your study/syndicate and write down the examples.

Specific Outcome 4:

Recognise events that impact on short term insurance Action 16

The impact of location, circumstances and claims history on policy premiums is explained with reference to actual examples. Contact a senior person in the Claims Department of a short term and ask how location, circumstances and claims history affects short term insurance policy premiums. Write down the explanation and give two actual examples that you know of to explain this better.

Specific Outcome 4: Action 17

The frequency of claims is explained in terms of nature of risk.

Record in your own words why you feel that the frequency of a policy holders claims will impact on the terms of the nature of risk for the insurer. Discuss this in your study/syndicate group and write down the explanation that you all agree on.

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Number

Aspect of task Done

Specific Outcome 4: Action 18

The concept of size of risk is explained using a graph to illustrate the underlying principles. The price of the insurance premium is determined by the size of the risk involved for the short-term insurer. Illustrate the relationship between Size of Risk and Premium Price by drawing a graph, with Size of Risk on the Y - axis and Premium Price on the X - Axis. Compare your graph with those of the other members of your study/syndicate group. Keep your graph in your portfolio of evidence.

Specific Outcome 4: Action 19

A peril is explained with reference to different classes of insurance. Look up the meaning of the word “peril” in a dictionary. Then list five (5) different types of perils faced in the world. Contact a senior in the Claims Department of a short term insurance company and ask him/her how each peril relates to the different classes of insurance. Discuss the explanation in your study/syndicate group and write down the explanation.

Specific Outcome 5:

Apply knowledge of customer profiles and risk to short term insurance Action 20

In order to more accurately determine the risks, hazards and perils attaching to the customer’s profile, material information must be gathered from and about the customer. Select a prospect (someone that you know) you wish to assess and then contact the SA Special Risks Association (www.sasria.co.za) and /or a senior person in the public affairs department of a short term insurance company and ask for the following resources used by most insurers:

- a proposal form - quotation forms - broker’s closings - a relevant survey outline (if possible) - market intelligence - competitor information ditto - relevant news media releases (if available) - their own statistical records (if available)

Contact the person (or the public affairs department of a company) you wish to assess and ask for an interview regarding their short term insurance. Carefully explain the study purpose of the exercise. Remember that when you assess a risk, you must be sure to ask as many questions regarding the risk as is possible. Rather ask too many questions than too few. You will need to work out which information gained is material to the risk, and then decide on an appropriate rating structure. Ask the following questions which form a general guideline for working out a risk profile for an insured. Depending on their occupation, some questions may not need to be asked: the title of the person the risk addresses of all situations, including those in other

territories within the territorial limits the class of occupation undertaken, including all subsidiary

activities the items to be insured against loss the amounts to be insured for under each class the construction of the buildings the turnover of the company to be insured staff numbers and occupations

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Number

Aspect of task Done

the amount of exports to other territories details of risk protections, including alarms, safes, fire-fighting

appliances and security protections details of customers or suppliers in other territories or overseas the target market for the insured’s products details of the actual work undertaken by the insured details of any hazardous activities undertaken the loss and insurance history of the insured Appropriate financial details such as year-end times, audit

procedures, and general quality control. When you have gathered the relevant information complete the Proposal form. Try to fill in the Quotation form as far as possible with the information at you have been given. Then submit both forms to the insurance company asking for them to complete the assessment process and to return the Quotation form to you with explanatory notes where possible. Compare the quotation you receive with the quotations of the members of your study/syndicate group.

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GUIDE FOR ASSESSMENT OF PORTFOLIOS Assessment Criteria

Learner is competent Learner is not yet competent All or part of each activity not done or incomplete NOT done or all questions not answered

SPECIFIC OUTCOME 1

Know and explain the concept of short term insurance

SPECIFIC OUTCOME 2 Identify the different products that a short term insurance organisation/provider markets.

The concept of insuring for a fortuitous event is understood and examples are used to illustrate this concept

The concept of different needs at different times in a person’s life is illustrated on a time line.

The possibility of needing insurance is compared for three different events.

Basic terms associated with short term insurance such as insurable interest and indemnity are understood and explained with reference to a specific policy.

The advantages and disadvantages of short term insurance are listed from the point of view of the policyholder.

The effects of a particular event on a short term insurance organisation are compared for a scenario with or without reinsurance.

The implication of non-disclosure for the individual and the organisation are explained for short term insurance.

Five different short term insurance products are named with examples of each.

The excesses on different products are compared based on the risk and characteristics of the product.

The benefits of products are compared with reference to policies.

The basis for the classification of a short term policy is indicated according to its target market.

The explanation and examples not recorded

The concept and illustration are not recorded

Comparison not recorded

Terms and explanation are not recorded

List not recorded

Comparison not recorded

Implication and explanation are not recorded

Products are not recorded

Comparisons are not recorded

Comparison not recorded

Classification is not recorded

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Assessment Criteria

Learner is competent Learner is not yet competent All or part of each activity not done or incomplete NOT done or all questions not answered

SPECIFIC OUTCOME 3

Categorise the different types of short term insurance

SPECIFIC OUTCOME 4

Recognise events that impact on short term insurance

SPECIFIC OUTCOME 5

Apply knowledge of customer profiles and risk to short term insurance

The risk type in two short term policies is compared and reasons are given for the difference in risk.

The broad classes applied to short term insurance are named with an example of each type of insurance.

Two examples of specialist categories of short term insurance are listed with examples of each type of insurance.

The impact of location, circumstances and claims history on policy premiums is explained with reference to actual examples.

The frequency of claims is explained in terms of nature of risk.

The concept of size of risk is explained using a graph to illustrate the underlying principles.

A peril is explained with reference to different classes of insurance.

Comparison not recorded

Classes and examples not recorded

List not recorded

Explanation and examples not recorded

Explanation not recorded

Graph not recorded

Explanation not recorded

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ADDITIONAL NOTES Facilitators’ Notes. The specific objectives of this programme are: The qualifying learner must be able to: 1. Know and understand the concept of short-term insurance 2. Identify different products that a short-term insurance company markets 3. Categorise the different types of short-term insurance 4. Recognise events that impact on short-term insurance. 5. Apply knowledge of customer profiles and risk to short-term insurance 6. Ask questions to obtain information. Be sure to draw distinctions between long- and short-term activities and the reasons these are different. Focus on the different needs of short-term insureds, and focus on the life span of each policy type. In going through the material for this section with the learners, be sure to focus on the work-related concepts of the information. Make sure that you have obtained a variety of different types of wordings, and endorsement forms of several classes of cover. Ideally you should bring with you each of the following documents, preferably from different insurers – (you could ask learners to bring copies of their own organisations’ wordings):

- A personal lines policy - Specialist class wordings, such as Contractors’ and EAR, guarantees, liability

commercial - Standard wordings from Marine and Aviation insurers commercial - An Assets wording commercial - Other non-standard wordings such as trade credit, commercial riot and strike, kidnap

and ransom. It is important that you use these wordings mostly for display purposes. The learners cannot be expected to become expert in the cover granted, but you must highlight special covers, extensions and exclusions. Describe how insurers determine which product is aimed at which markets, and who provided competition for each other. Brief the learners on the events that may have lead to the need for certain covers. Remember that the focus is on short-term insurance. Use case studies of historical events that influence the need for the availability of products in general. Describe how insurers market their different products to potential insureds especially through the use of intermediaries. Focus on the relationships between the buyers, sellers and intermediaries. It is important to include reinsurers in this description of relationships. Show how reinsurance provides vital support to the industry as a whole, and not just to insurers. Explain how products sold are rated for risk and premium, and where the statistical information necessary for these is derived. Have the learners perform a risk assessment and rating example themselves. Make use of claims statistics to assist in the rating activity. Give examples of how rating criteria may change following specific events that influence covers and premiums. Ensure that different members of the group are afforded opportunities to provide specific information regarding their own experiences in the research and provision of new products. Be sure that you focus as much as possible on practical work-related issues in the learning. Learners must demonstrate an ability to use the information and skills gained by the learning in the workplace. Wherever possible, have the learners participate in the learning by using these methods.

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The concept of short term insurance.

Short term insurance is insurance that runs for only short periods of time (or for short terms) - a month or a year, or for any other agreed period, before it needs to be renewed, re-rated, reassessed or reissued. This is unlike a life or pensions policy that is issued and then runs until the insured either dies, or goes on retirement. Short term insurance also focuses in general on material goods that can be insured – such as buildings, motor vehicles, goods in transit, or to protect the insured against liability that arises as result of his activities, and which cause damage to other parties’ property or lives. When asked by a customer to describe the concept of short term insurance, it is important to know that short-term policies run for specified periods of time. Both the insurance company and the customer decide upon these periods. The insurer decides how long they are prepared to remain as the risk carrier until they wish to check the terms, premiums and risks associated with the customer’s assets. The period is also influenced by the need of the customer in seeking to protect his assets through the purchase of insurance cover. The decision regarding the period (or term) of the policy is decided at the start of the period, and is agreed by all parties to the insurance – the customer, the insurer and the intermediary (or broker.) After an agreed short term, or period expires, the insurer will meet with the customer (or the customer’s broker) to discuss the continuation of the policy cover, beyond the original term agreed. In these circumstances there may be new premiums or conditions applied, sums insured may be increased, and some of the cover initially given by the policy may be discontinued. Also, sometimes during the period, or term of the policy there may be changes required to the cover given. The insurer or the customer may even wish to discontinue cover entirely at any stage within the term of the policy. Activity: The customer wants his policy issued from 1 December for 5 months, and then he wants the policy to run for a full year after that. What will then be the ‘terms’ of the policy? Outcome: The first ‘term’ of the policy is 1 December to 30 April, with the policy ‘term’ renewing (or starting again) on 1 May. The next ‘term’ is then 1 May to 30 April the following year.

There are many reasons why customers choose varying short terms for their cover to run. They may purchase a new vehicle on the 15th of a month, when the policy term expires in 6 weeks. The first term of cover for that vehicle would be form the 15th (date of purchase) to the first of the month 6 weeks thereafter (renewal date) say 15th March to 1st May. The policy, if renewed will run for another year, and the next term will then be for twelve months after 1 May.

Another very common term chosen by customers is a monthly policy term. This is common because it means the customer may pay the premium monthly, which may be more affordable, rather than in one annual amount (which is how annually renewable policies are paid.) The monthly policy is in force only for a month at a time, and is ‘renewed’ at the end of every month. A customer may also choose a policy term of just a day or two. He may need cover for a single transit of goods from one town to another. This would constitute a very short term for the cover, because once the transit is completed, the term is also completed, and the

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policy cover ceases. Sometimes a short-term policy can provide cover for more than a year. This may be the case for example of a building contractor, who is constructing a factory. He may need to work for 2 years to complete the work, and so his policy must provide cover for the 2-year term. This is still a short term policy, because it will have to be renewed, or allowed to fall away at some stage in the future. It is important to know that the definition of the short-term insurance industry and its allocated areas of operation are legislated for in South Africa. The Insurance Act of 1999 provides regulations which describe the classification of short term insurers, their products which may be sold, commissions which are payable to intermediaries (brokers or agents) as well as reporting and operational criteria and guidelines. Short term insurance describes a number of different categories of cover, such as commercial insurance (on commercial or industrial properties, for instance) personal insurance (on private property or assets, or corporate (in respect of multinational assets or interests. Activity: Describe 4 different possible policy terms that may be needed by a customer. Explain why they may be needed.

As well as choosing different term policies, based on his need, the customer may find a need for different types of policies at different stages of his life, when his needs are influenced by

- Age - Financial status - Business conditions - Social and economic factors - Political influences

Age As people grow older their needs sometimes reflect a different focus. They may not want to drive the fastest, sleekest motor vehicle, and they may decide to combine their work and leisure vehicles, in one use. They may plan to focus more on the financial implications of self-insuring more of their risks.

Example: Peter is a 65 year old retired businessman, who is about to relocate to the coast for his retirement. On clearing his document files in preparation for his move, he finds all of the short-term policies he has had in his working lifetime. He is surprised to find that he has had ten policies, some of which are no longer in force: 1. When he first commenced working at the age of 18 he purchased a motor vehicle policy in respect of

his first car, a 1952 Ford roadster, which he bought second hand for the equivalent of R 75. 2. When he married, he lived in a small flat with his new wife. He bought another car, and insured it,

together with the contents of his flat and also purchased all risks cover on his wife’s wedding and engagement ring. The cover in respect of the contents was for when they were located at the risk address, but the all risks cover was needed for the fact that the ring was worn both at and away from his dwelling.

3. At the age of 27, he was promoted at work to assistant branch manager, and purchased a personal accident and disability policy, to protect himself for loss of earnings, if he was injured in an accident, and was prevented from working in the future.

4. Soon after this his wife and he had their first child, and purchased a house in a well-to-do area of Johannesburg. He needed to cover the property against damage, and so purchased a homeowners policy. He purchased increased contents cover, and further all risks cover in respect of his wife’s jewellery, his son’s bicycle, and his own sporting equipment. He also needed liability cover in respect of losses possibly arising to third parties at his home. He also insured his two private motor vehicles.

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5. At 35, he started his own business, providing a wholesale toy supply service. He bought a commercial short-term policy in the name of the business, which included fire cover on the offices, office contents for his contents, a marine open policy for the import of his toys, group personal accident for himself and his employees, and a liability policy for losses arising to third parties at his premises.

6. During the next ten years, his business grew, and in addition to the above, he bought further policies to cover loss of money at the premises and in transit, goods in transit for toys being delivered, and in respect of the trucks and cars in his motor fleet.

7. He then purchased SASRIA riot cover for losses arising to all of his assets, including those at his private property.

8. After a time he purchased his own property, and adapted his insurance to include his liability as a property owner rather than as a tenant. He also covered his property for Combined covers.

9. Peter insured his debtors’ book under a credit guarantee policy, which guaranteed payment via an insurance policy, in the event the debtors defaulted.

10. At 65 he sold the business, and purchased a new home at the coast, which he has fully insured. Financial Status The more the customer’s business is exposed to larger perils, the more he needs to be sure that he is adequately protected. He will need to protect his assets, being items such as buildings, stock and machinery, and these will need material damage protection such as fire, theft, and money, as well as glass and goods in transit. In addition he will need to insure the revenue and profits of the business, under a business interruption policy. The motor vehicles will need to be insured, and he will also need to make sure he is covered for losses arising to third parties, under a liability policy. If he is in a specialist type of business, the need for correct protection becomes even more important. He will need to insure his contracts, imports or special liabilities for example. In terms of personal insurance, as the family leaves the house, he may want to downgrade his house in size. The customer may want to purchase a number of investment tools (stamps, coins, properties) and he will need to protect these. He may also wish to increase any personal accident insurance cover to insure his income should he be unable to work further. Business Conditions Foreign investment confidence and the falling Rand may require the customer to cut back on his business operations. This could result in lower profits, job losses, and any number of other considerations. He may need to refocus his business strategies and look to different avenues of doing business. He may want to branch into new markets, and close others down. He might need new and different machinery. Social and Economic Factors One of the first things that customers look to in terms of cost cutting, may be the short term insurance premiums they are paying. It is imperative that the customer be correctly protected against risks or perils arising to his business or personal assets. In seasons of economic recession or depression, the need for minimal cover and affordability will be more closely monitored. In these times, special cover against purchase costs in other currencies will need closer scrutiny. Political Influences Conflict in the world today is a matter of fact. These ongoing events continue to influence world markets and the impact of these effects can be very severe. An example of this would be the effects on world markets caused by the terror attack on the World Trade Centre in September 2001. The huge losses suffered have had a dramatic effect on premiums and cover. It is very important to realise that the short-term cover he purchased must meet the customer’s needs. In addition, government regulations require that insureds contribute to various funds to protect the employees and workers of all companies. These contributions are in respect of workmen’s’ compensation and unemployment insurance. These latter

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examples cannot be considered as impacting on short term insurance needs, as they are compulsory insurances required by law. Activity: Describe 3 of the factors that could influence a customer’s insurance needs at different stages of his life. SHORT TERM PRINCIPLES In short term insurance there are a number of founding principles that must apply, to enable the insurance cover to operate, and to protect the assets of the customer, in the event of losses occurring.

Fortuitous Losses.

For the insurance policy to provide protection to the customer under short term insurance, any loss suffered by the customer must arise as a completely sudden and unforeseen circumstance. This means that losses must arise as a result of an accident to the customer. There can be no cover under the short term policy for losses that the customer deliberately sets in motion. Examples of a fortuitous loss would be: - Lightning damage to a building - The theft of a motor vehicle by unknown perpetrators - Flood damage to a house - Slipping on a wet floor and breaking bones. Losses that would not be considered fortuitous, and therefore not covered under short term policies are: - Arson or deliberate fire starting by the insured. - Leaving a car unlocked and with the keys in the ignition, and then going to the

cinema - Leaving a bath tap running with the plug in. - Deliberately running and sliding on a polished floor Customers may also not receive compensation for losses that occur when he is breaking any laws, whether wilfully or unknowingly. These would be seen a not arising fortuitously.

Examples would include:

- Causing an accident whilst driving without a licence. - Suffering financial losses as a result of fines imposed for not paying taxes on time. - Injuries caused to the customer by deliberate self -injury. Losses which may arise to an individual or business and which are likely to need the protection of an insurance policy include: The risk of injury or death as a result of an accident. Cover is available under

personal accident and illness policies Risks to material possessions arising from and covered under fire, storm, theft, loss

of money, fidelity losses from fraud committed by employees of the insured, goods damaged while in transit, all risks losses to high valued items, and losses by collision or theft of his vehicles.

Liability to third parties arising from acts of negligence on the part of the insured or his employees.

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Indemnity Indemnity is a very important principle of insurance. It means that the customer must be exactly compensated for his losses, so that he is in precisely the same financial position after he is recompensed for a loss, as he was before it occurred. The insurer can provide indemnity in one of four ways.

- By payment of cash to the customer, the amount being the proven value of the loss suffered. This method is used mainly in the classes of all risks, money, theft, goods in transit, and fidelity.

- By replacement of a lost or damaged item by an equivalent item. This method is used in all risks, glass, motor windscreen, for example.

- By paying for the repair of a damaged item, such as a motor vehicle. - By reinstating the item, such as a building to its pre-loss state, such as painting,

retiling, repaving. In most instances, however, exact indemnity does not occur. There are factors that influence the indemnification of the customer. Here are some of the factors:

The application of a deductible. If the customer is required to pay the first R 500 of each loss he suffers, then he will always be at least R 500 out of pocket at the settlement of a claim - Limited sums insured. If the customer elects to insure his vehicle for R 100 000, and the actual value is R 102 000, he will receive only R 100 000 if his vehicle is written off in a fire, and he will lose the R 2 000 difference in value. - The application of average. Average is a policy condition in some types of policy (Fire, Business Interruption, Buildings Combined, and others mainly in the Fire classes) that makes the customer responsible for being sure that the sum he insures for is correct. This insurance value must be equal to the actual cost of replacing a property damages or lost. If the sum insured is lower than the actual replacement value, the customer will be penalised, by having his claim settlement reduced, and he will again not be fully indemnified.

Insurable Interest A customer must have an interest in any item insured, to the extent that he will personally stand to suffer financially, if the item is lost or damaged. This is the principle of insurable interest. In short-term insurance, insurable interest must be in place at the time a loss occurs. The insured does not have to own the items that are subject of a loss, but he must be disadvantaged by the items being lost. An example would be of a guitar that is in the Insured’s possession on a permanent loan basis. Contribution In the same way, a customer may not benefit after a loss, by receiving the same amount of payment from more than one insurer. If the customer insures the same property with two different insurers, and it is lost, each insurer will only pay half of the loss amount. In this way the customer will receive in total only the full value of the property claimed for, but not more than this amount. Subrogation Once the insurer has settled in full for an item that has been lost or damaged as a result of the influence by some other party (not the customer), then the insurer has the right recover on behalf of the customer, money expended. An example would be where an insured is paid a settlement in respect of damages suffered to his car as a result of negligence of another driver. Once the settlement is paid, the insurers have the right in terms of subrogation to recover the

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amount paid from the third party for their own benefit. The word subrogation is from the Latin, subrogare which means ‘to stand in the place of.’ Common Law All of the principles of insurance are influenced in some way by various legal aspects, one of which arises from Common Law. This is a series of generational laws that have made their way into Law because of a historical and general usage. Some areas where these are seen is in the general conditions of the policies, where reference is made to premium payments, protecting the customer’s assets, no allowance for misdescription, etc. Common Law says that these things must form part or the contract. There really is no need for the policies to state these Common Law factors, but insurers like to reinforce them, for the benefit of the customer. Non-Disclosure and Material Information In order for an insurer to properly provide cover to a customer, and to ensure that the customers needs are adequately met, he needs the fullest possible information, to enable to correctly assess the risks that might pertain to the customer’s assets. It is vital, therefore, (and stated within Common Law) that the customer offers all information about the risk, that may influence the insurer’s decision on

- Accepting the risk in the first place - Amending the terms of his acceptance (increasing rates, or adding in deductibles) - Reducing the benefits under certain classes of business - Imposing conditions on the customer to protect the risk better ( asking for a burglar

alarm to be installed) Only information that would affect the insurer's decisions, otherwise known as Material Information or Facts, needs to be disclosed. An example of a material fact which must be disclosed is:

- If a customer has had his driver’s licence suspended for reckless driving, and he is seeking motor insurance, he must disclose this to the insurer.

The fact that he has a suspended licence is not a material fact to a proposal for Glass insurance. The consequences of non-disclosure of material facts on the customer are that, potentially the cover will be refused, and any claims for losses suffered will not be met. The entire policy or a section may be cancelled. Activity: Describe three of the basic principles of short term insurance and give illustrative examples in your descriptions.

Advantages and Disadvantages of Short Term Insurance As can be seen from the vast numbers of customers who have purchased the benefit of insurance cover, and also from the size of the short term insurance industry in South Africa, the benefits of having insurance far outweigh the disadvantages. The advantages of insurance include:

- Safety and protection of finances in respect of risks arising to the customers assets - The application of the principle of indemnity, which ensures that the insured can be

placed in his previous position via the medium of insurance. - A transfer or sharing of the risk and a ability to benefit from the power of many

customers sharing in the provision of cover by their contribution of premiums - A continuous focus on the business practices of certain industries and ongoing

improvements and development

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- The freedom to pursue new markets, knowing that the impact of losses on the business are minimised by the insurance

- Knowledge that ongoing financial needs will continue to be met via the insurance channel

- There are always new product offerings that more readily focus on the specific needs of the customer

Some of the disadvantages of short term insurances are:

- The real test of the services offered only becomes apparent following a mishap or misfortune (a claim). The product sold is offered as a promise to perform in future, and the insured may find at the time of claiming that he was not covered to the extent that he wished, for a variety of reasons.

- Premiums are becoming increasingly more expensive, and difficult to afford. Insurance companies use a historical rating system, based on statistical information gained form all in insureds in a certain category. Some ‘god’ insureds may suffer in terms of premium costs as a result of negative results across a certain industry, even though they themselves have a profitable loss history.

- Systems of policy issue and administration procedures are cumbersome, expensive and impact negatively on the industry as a whole. Also, in recent years the insurance industry has needed to follow an economic path of cost containment and so the training focus has shifted to providing quick and efficient service, rather than one of expertise and knowledge. At junior level, there may be a lack of adequate training, resulting in reduced underwriting quality and claims knowledge. This impacts negatively on the product received by the insured.

- Policy wordings are difficult to read, and more difficult to understand as the language is sometimes archaic and badly used. For the policyholder, this means that he is often unable to correctly interpret his exact cover, and can lead to confusion and frustration.

- Premiums payable for short-term policies do not represent an investment. The insurer retains premiums whether losses occur or not. These premiums are therefore a direct expense for the insured, with little reward for good performance, other than by way of potential premium savings in the next year.

- The operating costs of the insurer are paid for by the customer in the form of premium, whether these are costs-effective and well managed or not. In certain instances, an insurer may require a premium increase, just to afford its own expenses.

- In recent years the number of direct insurance carriers has dropped in South Africa. This has resulted in a smaller ring of choice for the insured, as well as the establishment of a cartel of insurers, who are able to control covers, rating and service levels as they see fit.

Activity: Describe 3 advantages and 3 disadvantages of short term insurance. Use examples to illustrate your answer

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The impact of particular events on short-term insurance organisations CASE STUDY: The Terror Attack on the World Trade Center – New York 11 September 2001 At about 08h50 on the morning of 11 September 2002, a Boeing 767 airliner en route from Boston to Los Angeles was hijacked soon after takeoff by a number of persons. These persons were determined to commit an act of staggering magnitude to raise a profile of terror in the minds of the American and the world’s population. The airliner was deliberately crashed into a tower of the world Trade Center. Soon after, a second airliner was taken, and again it was deliberately crashed, this time into the other tower. Approximately 350 people on board the planes were killed instantly. Soon after, the towers, as a result of the intense heat generated by the burning aviation fuel, collapsed. The steel reinforcing within the building had melted, in the heat, and the collapsing floors fell onto the building itself causing a total collapse. Another 6 000 people died as the towers fell. Apart from the tragedy of lost lives, (and the impact on the life industry) probably the main brunt-bearers of this horror was the short term insurance industry, including reinsurers. Consider the following classes of short term insurance that would have been in place, and would have responded: Fire Insurance: The Towers themselves would have been insured against loss by fire or allied perils. While in South Africa so-called terrorism is not covered by a standard fire policy, in America, it is. Impact by aircraft is a fire policy peril. Aviation Insurance: The airliners were insured for loss or accident, including as a result of hijack. Office Contents: All of the contents of the offices spread through a total of 200 floors – desks, chairs, pictures, filing cabinets and ancillary equipment - was covered. Business Interruption: As a result of the businesses within the Center being unable to trade for a long time, and as their results are very badly affected financially, Business Interruption insurance will be in place. Personal Accident: This policy will pay for the deaths of those people killed in the buildings and on the aeroplanes. Motor: Vehicles, parked near the Trade Center, that were destroyed or damaged in the collapse, will be paid for, by this policy Income Insurance: People injured and unable to work again may claim under this class for ongoing income. As a consequence of all of these different classes of insurance needing to respond to a single event, insurers had what are known as accumulation problems. This is when a number of classes are required to fund claims for the same loss, and the reinsurance treaties may be insufficient to cater for the amount needed. A further cause for concern is that the amount of any risk that insurers can retain for their own account is dependent on what they call the PML (probable maximum loss) EML (estimated maximum loss or, in America, MAS (maximum acceptable suffrage) This is an arithmetical calculation of what the absolute worst amount of loss that can be suffered to any risk, at the same time, and from the same cause. In the case of the World Trade Center, insurers reckoned that about only one third of one tower could suffer a loss by a Fire peril from one cause. They would have based their retention on this amount; after the event they were found to have been woefully short in their calculation. The difference between the amount reinsured, and the amount to be paid to claimants must be funded by the individual insurers. Other particular events that can have an effect on a short-term insurance organisation are: Sever flooding as a result of storms, such as those that caused extensive damage to the

Northern Province and Mozambique in 2000. The loss of a single large sailing vessel, such as the Exxon Valdez, which resulted in

massive oil pollution to the coastline of Alaska. The explosion in a fire works factory in Holland, which flattened a village near Utrecht in

2000, and caused over 200 deaths. Major air disasters such as the Pan Am-KLM collision in Tenerife in 1975 Hurricane damage by Andrew which devastated the east coast of the USA in the 1990’s The earthquake which destroyed much of several villages and towns in Japan, including

Kyoto in 1996

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Activity: Describe 3 particular events (other than those described above) which have had major effects on short-term insurers. What are products? In short term insurance, the products are the actual types of policy documents that are provided by the insurers to cover the customer’s property or to otherwise safeguard his assets or interests. In the same way that ordinary retail products are sold to meet a specific need of a customer, so are short term insurance products sold to provide a specific solution to a customer’s need. In South Africa, cover offered by some policies are subject to a market agreement, and all companies offering this product offer the exact same policy cover. This product is the Multimark III, which, apart from packaging, printing and marketing features, is identical in cover offered by all insurers. Premiums charged, and other terms and conditions, such as deductibles, or survey requirements may vary, but the policy wording does not. There are not many market-agreed wordings, and most insurers offer specifically written policy wordings to their customers. This means that the product is, in most instances, unique and readily identifiable as an offering by a specific insurer. Insurers offer a variety of products in the short term insurance industry, and many of them are branded products, but in general, the following constitutes a list of product offerings in South Africa: In certain instances, short term insurance is provided by the state, in terms of general risk offerings, such as SASRIA cover, or in terms of compulsory insurance such as the Unemployment Insurance Act, or Compensation for Occupational Injuries and Diseases Act. In the short term insurance industry, private insurers offer the following products:

- Multi Peril Policies such as Multimark III, which combine a number of covers under one policy document, and which are designed to protect the assets and interests of the customer, such as his buildings, plant and machinery, stock and contents of his commercial premises, his profits, money, goods in transit, motor vehicles, glass, electronic equipment, office equipment, and to protect him against any liability to others form his activities. The customer will be protected for loss or damage to these assets caused by fire, flood, theft, or other accident, if has purchased such cover.

- Assets policies, which offer a similar cover to a multi peril policy, but which describe

the assets insured in more general terms, and do not need to give exact definitions of items insured. These policies are sold to larger corporate organisations that have very high values to insure.

- Specific and specialised covers. A customer may wish to purchase cover for a fleet of boats or aircraft, (or for one ship, or aircraft) or for a specialised item of equipment mechanical breakdown. He may be a building contractor, and need to insure for loss or damage to the contract he is busy on. He may not need a multi peril policy, but only one for Fire insurance. The customer may need to cover his motor workshop for Motor trade insurance risks.

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- Personal property policies. These are designed to protect the private assets of individuals and families, and cover the houses, contents, vehicles, boats or other craft, any high value items such as jewellery, stamps or coins, and other assets of a personal nature. These will be covered if damaged or lost by fire, flood, theft, or other accidents.

- Accident and health policies. There are a number of products available in the short term industry that provide cover to individuals or families, or for staff members or groups, for losses or injury arising out of accidents or as a result of illnesses or diseases occurring. Such covers include death or bodily injury, inability to continue working, hospital costs insurance, dread diseases such as cancer or heart attack. It is important to distinguish here between life assurance, and these covers. These provide financial support to customers in terms of medical expenses, continuing income and other, but they are not life assurance products.

- Financial products. Certain insurers offer cover for lost credit cards, retrenchment

benefit insurance, costs associated with having twin babies, and many other types of highly specialised cover.

Excesses or Deductibles

In a lot of the cases illustrated above, customers will be required to share in the risk protection under the policy, often in the form of a deductible or excess. This is also know as a first amount payable, and it is a specified amount of money that the customer is required to bear, at the time any loss is settled. An example would be under a motor policy, where the vehicle limit may be say R 100 000, and the excess or deductible 5% of amount of the claim subject to a minimum of R 2 500. If the customer suffers damage to his vehicle in the amount of R 62 900, the amount of the deductible will be R 3 145. (i.e. 5% of R 62 900). The customer will therefore have to pay R 3 145 to the repairer, with the insurer contributing the balance – R 59 755. In many instances the excess is a flat or fixed amount, rather than a percentage, for example engineering classes where the contractor may be responsible for R 10 000 for every claim. A loss of R 86 000 will be settled directly with the contractor for R 81 000. Products sold to protect the customer against particularly high-risk businesses, diamond and jewellery; electronic equipment sales or manufacture for example will carry a generally higher excess structure. Excesses may also be imposed where a higher than normal hazard exists in terms of the risk to be protected. For example, insurers may want an excess of R 10 000 on storm risks to customers assets in an area of generally high rainfall, or near to a river that regularly floods in the rainy season. Activity: 1. Describe five different products available within the South African short-term industry, and state what they intended to provide cover against. The benefits of products offered: Benefits payable under the policies described above are made on the following bases: For commercial and assets policies: Damage to buildings, stock and machinery and glass: The new replacement value of the

items insured, provided the sum insured has been correctly reflected.

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Money, theft, goods in transit and fidelity: The amount insured for, or the actual amount of the claim whichever is the lesser.

Marine and Aviation: The actual value of the goods and vessels Liability: the amount of the damages caused, or the limit per event under the policy

whichever is the lesser Business interruption: the amount of gross profit on turnover lost, provided the sum insured

has been correctly set. Motor: the market value of the vehicle or the sum insured whichever is the lesser. Specialist classes: the actual repair costs or the limit selected under the policy.

Personal Insurance: The benefits are payable in the same way as for commercial insurance, depending on the class of cover selected. For accident and health covers benefits are payable up to the limit selected by the insured. Short-term policies can be classified in the following categories:

Commercial and industrial policies covering manufacturing concerns and administrative operations with sums insured and values up to certain organisation-specific limits.

Corporate policies for large high valued corporations and multinational organisations

Personal policies issued to private individuals Specialist policies specifically prepared for individual organisations,

dependent on their specific needs. Insurance companies categorise different types of short term insurance according to a number of factors. Some of these are

- Common types of risks that may arise - Reinsurance treaty support from reinsurance companies - Historical categorising of the covers. - Actual cover offered

Different Risks: Even though similar policies may be provided to cover similar occupations, the risk attaching to each of the policyholders may be different. Example: ABC Wholesalers (Pty) Limited and Z1 Suppliers (Pty) Limited are two separate entities operating as toy wholesalers. They each have premises in the Edenvale area, and each employ approximately 100 staff. Their turnover is each approximately R 250 million per annum, and profit levels are almost equivalent. They are in direct competition with each other and together make up almost 100% of the wholesale toy market in South Africa. On the face of it they are very similar in terms of risk profile, and may be offered similar terms for similar insurance benefits. The risks are entirely different for the following reasons: ABC owns its own factory, while Z1 rents the premises. ABC utilises the services of a distribution contractor, while Z1 undertakes their own deliveries. This will impact on motor and goods in transit insurance. ABC makes all its payments, including salaries and wages by means of electronic funds transfer (eft) while Z1 pays all its expenses by cheque. This influences the need for money insurance. ABC does its deliveries direct from the bond store at customs, while Z1 first transfers all the goods to its own warehouse. The effect of this is most heavily felt in the theft and fire insurance sectors. ABC practices effective risk management, including regular fire drills, testing and maintenance of equipment and has a manager to oversee the fleet. Z1 does not. This influences the motor and liability sections of the policies. ABC has subscribed fully to the principles of skills development and employment equity and has a static staff turnover. Staff is well trained and efficient. Z1 does none of these.

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The following are the generally accepted categories of types of short term insurance offered: - Fire classes: for losses arising under Fire policies, (including storms, floods,

earthquake, sprinkler leakage, riot and strike, malicious damage, subsidence and landslide); Buildings Combined policies (for loss or damage to buildings only); Office Contents (loss or damage to contents of commercial or corporate offices); Business Interruption (loss of revenue, income or profit, as a result of the covers given by Fire policies); Accounts Receivable (insurance provided to cover the costs of determining the exact amount of money owed to the insured by his customers.) These policies are sold to commercial enterprises, either as multi peril or Assets policies

- Accident classes: for losses under Theft policies (for goods or stock stolen or damaged during a theft); Money (loss or damage to money or negotiable documents); Glass (loss or damage to fitted glass); Fidelity (for losses suffered as a result of theft or fraud committed by staff); Goods in Transit (for losses arising to goods of the insured while being transported); Business All Risks (for loss or damage to expensive items that are used away from the customer’s offices); Electronic Equipment (for loss or damage to computer and other electronically powered equipment.) These policies are also sold to commercial enterprises, either as multi peril or Assets policies

- Liability classes: There are a number of different types of insurance offered to the customer to protect him against legal costs which he will have to pay for damages or loss cause to other parties, arising form his activities. These may be General, Tenants, or Property owners liability (for damage he causes because of damage form his being a tenant or the owner of a property); Products or Defective Workmanship (for damages arising from a wrongly made product, or from bad workmanship); Professional Indemnity (for loss or damaged caused as a result of the Insured’s profession – wrong advice, bad design.)

- Personal Accident: This covers personal injury or death of staff members, or individuals, either on a group basis, paying set limits, or on a stated benefits basis where the benefits payable are linked to the individual’s income.

- Motor classes: Motor policies cover for loss of damage to cars, buses, motorcycles, trailers, commercial vehicles, and can be bought for one vehicle or a fleet. The activities of motor garages and sales can also be covered under Motor Traders insurance.

- Engineering classes: Cover can be purchased to cover civil, building or earthwork contracts while under construction. Plant cover is for items of machinery, tools and equipment. Machinery Breakdown covers machinery which is out of use as a result of mechanical failure. Liability arising from these activities is also sold.

- Marine classes: These cover loss or damage to the ship or ships,(Hull) and their Cargo.

- Aviation classes: Cover is given for loss or damage to aircraft (Hull) and its Cargo, as well as for Liability arising out of the operation of aircraft.

- Personal Lines classes: Cover is provided for buildings (Houseowners); contents (Householders); vehicles (Motor); expensive items that may be taken or worn on the person (All Risks); motor boats or yachts or jet skis (Small Craft); and Liability. Some customers also purchase individual personal accident cover under these policies.

- Accident and Health policies: The customer can buy illness polices, medical expenses cover loss of income policies and other related covers.

- Bonds and Guarantees: Cover is available where customers are required to provide Suretyships in matters of a legal or contractual nature.

- Compulsory Insurance: Legislation dictates that all employers or individuals must cover their staff against accidents to staff at work (Compensation for Occupational Injuries and Diseases) loss of employment benefits (Unemployment Insurance) as well as third party motor risks (Multilateral Motor Vehicle Fund).

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Each of the above classifications is offered in direct consequence to the defined and calculated risk that certain events present, and which need to be protected against. Risk is essentially the chance of a loss. It is a factor inherent in a type of business, occupation or lifestyle that potentially attracts loss, by its own very nature. Insurance is a method of transferring, reducing or eradicating risk. Some of the types of risk attaching to a commercial risk – say a shopping centre – are:

- Fire or flood, if the property is susceptible to these - Theft of materials, goods and stock - Loss of money by hold-up - Liability to the public as a result of inadequate maintenance to the premises

Within a personal risk, the types of risks, while similar, may be less potentially severe, and therefore need a different mechanism to counter them:

- The values of potential losses will generally be much lower - Money would not be a specific risk - The potential for liability risks may be lower, as fewer people would visit, and

maintenance is not an issue to the same extent as for the shopping centre It is important to understand that only risks of a pure nature – those that would arise entirely fortuitously - may be covered by insurance policies. Speculative or deliberate risks are not covered.

Activity: Describe three different classifications of short term insurance, and discuss how these are made to protect certain identified risks.

Events that impact on short term insurance As already seen above, certain events such as the attack on the World Trade Center have an impact on the short term insurance industry, and on certain organisations or customers in particular. These effects on the industry are many and varied. They can be: - Financial. The results of a catastrophic loss, such as Hurricane Andrew, impact on all

sectors of the market, throughout the world, and result in increased costs, tighter reinsurance control and changes in world-wide participation by insurers.

- Social. The loss of the World Trade Center forces all insurers to be more focused on forging ties with others in the industry to form a united front in these maters.

- Political. Insurers offer a support mechanism to governments in lessening the effects on the populace caused by catastrophic events such the floods in Mozambique in 2000. Premiums charged for transferring risk a calculated based on years of research and the provision of statistics that allow a realistic predictability of the change of a loss occurring. These statistical chances are then translated into a rating structure. A rate for a fire cover of 100% on sum insured, means that insurers expect the item insured to suffer a total loss once in a thousand years (.00% + 1/1000th of a chance) A Theft rate of 20% on the sum insured means insurers expect total losses in the order of 20 times every one hundred years, or once every five years.

Rating and therefore premium charges are determined for the type of peril that the insurer feels is most likely to affect the chances of losses occurring to the item to be insured. So, for example, under a Fire policy, the customer may request that he be covered in case of the happening of any of the following perils:

- Fire, lightning and explosion - Storm and special perils

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- Earthquake - Malicious Damage - Riot and Strike - Sprinkler Leakage - Motor insurance attracts the following potential perils: - Theft of the vehicle - Accident damage to the vehicle - Accident damage to third party property or vehicles or persons - Fire damage to the vehicle - Medical expenses incurred in respect of persons in the insured vehicles.

These are perils to the safety of the items insured. That is they represent a danger to the ongoing financial status of the customer inherent in having the items insured available to him for his use. If the customer insures his building valued at R 1 000 000 against all of the above perils, he will be charged for each of the perils he wants cover against. These charges are added together – cumulatively – into a total premium. The actual rate charged for each of the perils to be insured is influenced by these factors which are based on unique information about the items to be insured: Situation: This is the site on which the item insured rests. Is it susceptible to flood damage; wind damage; earthquake; is the risk of malicious damage higher than normal because it lies close to schools, clubs or stadia Occupation: What the customer’s actual work undertaken involves effects the chances of perils arising. Dynamite manufacturing is potentially much more hazardous from a fire risk point of view, than is a church. Construction: Structures constructed of wood and thatch are potentially much more hazardous than those constructed from brick and concrete, because those materials burn more easily. Risk Protection: many risks can be substantially improved beyond their expected levels of hazard, by the implementation of a sound and progressive risk improvement plan. Protections include burglar alarms and bars, security back up, fire hoses and extinguishers, gear locks and tracking devices. Claims History: Numbers of claims and the amount paid for each also influence the rates charged. Two customers with very similar risk profiles will be offered different rates, if one has had a higher frequency and severity of claims occurrences that the other. The more the amount of claims costs incurred the higher will be the rating offered. The statistical basis used for rating of premiums in the short-term industry rely on the Insured’s experience tallying with the statistical chance of losses occurring. If an Insured’s loss ratio does not conform – if he has fire losses more frequently than his chances of say 1,5 every 1000 years, - then his rating structure is skewed by his actual experience. In this event he will be required to pay rates commensurate with his own ratio. Certain risks apply more highly to certain occupations. The risk of fire is potentially more severe in a high-rise building than in a single spread building, even if the values are similar. For a building under construction, the risk of fire is present more frequently near completion than it is when the shell of the building is being formed. This is because there are more flammable items in a building being fitted with fixtures and fittings such as lighting and carpeting. Risk in insurance is most aptly demonstrated within claims activities, most notably frequency

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and severity. Other terms to describe these are the likelihood of losses arising (frequency) or the economic extent of the loss when it does arise (severity) Risk incorporates both of these at all times. The actual arising of the loss would then lean to one or the other, when economic extent is determined. In the main, claims occur in two severity/frequency ratios. These are high frequency/low severity (all risks, motor, glass, household contents) and low frequency/high severity (aviation, large fire losses, liability.) In terms of ongoing provision of cover, the insurer might see a single large loss (low frequency/high severity) as an acceptable risk arising, and may continue with cover, provided visible steps are taken by the customer to improve the risk, and to show tangible efforts to discourage a repeat. But a continuous number of small claims (high frequency/low severity) will generally need a stricter risk improvement focus, and may even result in cancellation or non-renewal of the policy. The occupation or business of the insured also can be used to categorise risks. Businesses that are involved in hiring out equipment or machinery generally are classified as being at risk of suffering high frequency losses. Insured with massive values associated with dangerous occupations such as petrochemical risks are exposed to high severity losses, but not those of high frequency. This is because they are forced by the nature of their business to ensure high levels of control and protection; but a single loss, if it occurs could be of a massive magnitude or severity. Once all of these factors are taken into account, the customer will then have a rate charged for the perils he wants cover against, with the rate influenced by the underwriting features attendant in his situation, construction, occupation, claims history and protection profile.

Activity: Explain the operation of perils within a risk and describe 5 factors that have an influence on the rating to insure against the perils.

Insurable Perils: We have seen that risk is the chance of a loss arising to any property or item insured. Perils are the actual activities that cause a loss to arise, such as a fire, theft, collision or accident. Under short-term insurance, irrespective of the type of risk or type of policy selected, the following perils pertain to covers granted: Fire, lightning and explosion Storm, flood, hail and other weather perils Earthquakes and earth tremors Impact and malicious damage Riot and strike damage Leakage of sprinklers systems and fire fighting appliances Negligent acts by the insured or his employers Pollution and other long-term debilitating effects of industrial waste Droughts and famine Theft by employees or other persons Collisions and vehicle accidents Accidents arising to individuals or groups Electrical shortages to equipment Non-payment of invoices by customers Failure by contractors to complete contracts Losses caused by incorrect advice or incorrect application of products Sinking of sea-vessels or the crashing of aircraft

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Knowledge of customer profiles and risk to short term insurance In order to most accurately determine the risks, hazards and perils attaching to the customer’s profile, material information must be gathered from and about the customer. Most insurers utilise: - a proposal form - quotation forms - brokers closings - a survey - market intelligence - competitor information - the news media - their own statistical records In all cases where you are required to assess a risk, you must be sure to ask as many questions regarding the risk as is possible. Rather ask too many questions than too few. You will need to determine which information gained is material to the risk, and then decide on an appropriate rating structure. The following questions form a general guideline for determining a risk profile for an insured. Depending on their occupation, some may not need to be asked: the full title of the insured the risk addresses of all situations, including those in other territories within the territorial

limits the class of occupation undertaken, including all subsidiary activities the items to be insured against loss the amounts to be insured for under each class the construction of the buildings the turnover of the company to be insured staff numbers and occupations the amount of exports to other territories details of risk protections, including alarms, safes, fire-fighting appliances and security

protections details of customers or suppliers in other territories or overseas the target market for the insured’s products details of the actual work undertaken by the insured details of any hazardous activities undertaken the loss and insurance history of the insured Appropriate financial details such as year-end times, audit procedures, and general quality

control measures. A customer proposing for, say, Fire and Theft insurance would have the following sets of information common across both classes, and relevant to the risk profile: - Name age and address - Occupation, including any specialist work undertaken - Construction, including protections - Makes, models and values of items to be insured - Claims history - Any other pertinent (material) information Depending on the information received, a risk profile is then determined for the customer. These profiles may range from very good (where the risk is seen as very low) through medium (where the risk is considered normal for the type of business and values) to very high (where one loss could have catastrophic consequences, including for the public at large.)

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However if the customer was a watch manufacturer, the risk category would not be the same, as the Fire risk category for this occupation is not particularly hazardous, whereas it most certainly is for the Theft risk. There are no really hazardous activities within watch making that would extend the normal Fire risk, but the finished goods constitute a very severe Theft risk. Case Study: To Insure or to self-Insure Alan Masters, owner of Intercontinental Trucking (Pty) Limited, a large Trans-African freight operator knew he had to take some specific action. He had just had his motor fleet premiums increased for the third renewal in succession. The claims results had stayed mainly steady at around 89% of the premium he had been paying, while the numbers of trucks had also remained at about 55 for the three year period. He knew he needed to reduce claims, but also he needed to save costs, as fuel prices, and the devaluing Rand were impact heavily on his profits. He felt he had only three choices: 1. Carry on, paying the higher premiums each year; 2. Self-insure to the fullest extent; or 3. Reduce his

risk profile and submit to a combination of the two. He felt the merits and de-merits of each were: 1. He would always be fully covered, and would be able to undertake any work under the umbrella of

the peace of mind he received. But prices were almost prohibitive, and he may soon find his policy cancelled because of claims history. Also he did not have insurance that exactly met his needs.

2. If he self-insured he would not have to pay out up-front non-refundable monies, which included the insurers administrative costs, and commissions. But could he afford to suffer a write-off a very expensive items of equipment in the first months of the term?

3. He eventually decided on an aggregate excess policy, in respect of own damage losses, with a stop loss limit, so he would limit his total amount to be paid in any one loss (3). This gave him a measure of control over his costs, but insurers covered him for catastrophe losses. He could also afford to employ a fleet manager, whose main task it was to streamline the fleet operation and reduce risks and therefore, loss.

Activity: Do you agree this was the best method? Can you think of any more merits and de-merits within each option?