The Weird thing about Life insurance

 

The company’s betting you won’t die.

You’re betting you will.

What is an Insurance Bond?

 

An Insurance Bond is a three-party instrument whereby one party (Insurer or Bank) guarantees a second party (the principal) financial protection against a third-party (the contractor or Insurer’s client) failing to perform in accordance to the terms and conditions of a contract.

In the event that the client fails to meet the obligation or complete the contract in time, the Insurer has to pay the principal for losses incurred up to the amount specified in the Bond or undertake to complete the project.

 

Why are Bonds used?

- With the Bond, the Principal is assured that he will be compensated in the event of any non-performance

- It helps reduce the chances of incomplete, bankruptcy or poor workmanship causing the project to be abandoned

- Bonds are subject to stringent underwriting, thus there is a good chance the contractor/client will complete the project

- From the viewpoint of the contractor/client, it helps them with their cash flow as they only need to pay a small premium for the Bond as compared to the large Security deposit

What is Co-Insurance?

 

Co-Insurance is a method where several Insurers share direct responsibility for a risk, it increases the capacity of a market to underwrite risks.

What is Reinsurance?

 

Reinsurance is where an Insurer transfer part of a risk to another Insurance company (Reinsurer).

The Reinsurer can also transfer part of their risk to other Reinsurers, this is called Retrocession.

Reasons for Reinsuring:

1] Stability – It stabilizes the insurers losses by smoothening the fluctuations of the losses from each year

2] Capacity – The direct Insurer might not have the underwriting capacity to accept certain risks

3] Catastrophe Protection – Catastrophes can lead to massive claims, Reinsurance can cushion the effects of such events

Methods of Reinsuring:

1] Facultative – Customizable, time-consuming and costly

2] Treaty – Not customizable, Reinsurers are bound to accept risks without prior knowledge, less cumbersome and less costly

Types of Reinsurance:

1] Proportional – The amount of risks & premiums retained are shared in the same proportion by the Insurer & Reinsurer

2] Non-proportional – Reinsurer automatically accepts liability for all losses in excess of an agreed amount

Claim Disputes

 

Claim disputes between the Insured and Insurer may arise if the Insured is dissatisfied with the Insurer with respect to the quantum of loss.

The parties involved may go to Court to settle their disagreement, but it is expensive and time consuming.

Alternative methods of settlement are available, these include:

1] Mediation

This is a voluntary process, a Third-party (Mediator) helps to resolve the differences amicably between the interested parties.

The Mediator’s opinion is strictly without prejudice, his role is not to decide whose fault it is but to help the parties understand the whole situation and reach a solution that is acceptable to everyone.

Once an agreement is reached, it is enforceable by Law. if at the end of Mediation the parties are unable to come to an agreement they are free to proceed to Litigation or Arbitration.  

The main mediation centre in Singapore is the “Singapore Mediation Centre” (SMC).

Advantages of dispute resolution by Mediation includes:

- Parties have more control over the outcome

- Parties work together to solve the problem

- Time and Money is saved

- It is a less Formal and Confrontational proceeding

- It is more confidential

 

2] Arbitration

If the dispute is purely on the amount of compensation, Arbitration may be resorted to resolve the dispute.

Advantages of Arbitration includes:

- Less formal and can be completed quickly

- Less expensive

- The dispute is resolved fairly by specialized persons

 

Litigation

When unable to reach an amicable resolution, a claimant may have to resort to Litigation.

Advantages of Litigation:

- Gives the parties access to the knowledge and experience of the Judiciary

- The Court will give detailed reasons for its decisions

Disadvantages:

- Procedural requirements require interviewing witnesses and reconstructing facts after the event thus it is likely to be expensive

- Litigation takes more time, may even take years for a complex dispute 

Independent Damage Assessment Centre (IDAC)

 

IDAC was launched to help improve the vehicle accident reporting and Insurance claims process.

IDAC will ensure that the extent of damage following an accident is ascertained immediately so as to reduce any chances for aggravated damages or inflated claims.

This will help control the rise of Motor Insurance Premiums.

Motorists may visit IDAC for vehicle damage assessment after an accident, IDAC will help complete the accident reporting form.

Who are Loss Adjusters?

 

Loss Adjusters are independent intermediaries who assist in validating claim settlements fairly.

They investigate claims on the Insurer’s behalf.

They can help the policyholders contact the relevant specialist services, and ensure the eventual claim is fair to both the Insured and Insurer.

The idea of an independent adjuster is based on the principle that both the Insured and Insurer are interested parties, it is important to have the opinion of an independent professional who is acceptable to both parties as well as the Court of Law in the event of a dispute.

What does Indemnity mean?

 

Indemnity, means the protection against damage of loss.

In Insurance, a contract of indemnity is intended to provide financial compensation for a loss which the Insured suffers, and “restore” them back to the financial situation prior to the event which lead to the loss/damage.

The Insured is expected to be compensated for the full loss and nothing more, meaning the Insured should not make a profit from the loss.  

 

Contracts of Indemnity are usually applied for the following classes of Insurance:

- Property

- Liability

- Pecuniary

- Marine

Where a value can be placed on the subject-matter unlike Life Insurance. 

Why is the Insurance Company not the Proposer in an Insurance agreement?

 

In the Insurer’s case, they are generally not aware of all facts about the insured unless the insured tells them, therefore the Insurer is considered to be at a disadvantage as they cannot examine all aspects of the insurance that are material to them.

Hence, the Law sees the person taking up the policy as the proposer (main supplier of material facts to the agreement), and any non-disclosure of material facts will render the policy void.

In the Insured’s case, they can examine the specimen copy of the policy before accepting the terms in it.

Therefore, it is very important for the Insured to make a full and complete disclosure of material facts relating to the agreement to ensure that in the event of a loss, the claim is received without any complications.

Characteristics of Insurable Risks

 

1] Large number of insureds

2] Accidental Loss

3] Definite Loss (in terms of Time & Amount)

4] The Loss must create a Financial Burden

5] Affordable Insurance (cost of Insurance is generally a small fraction of the item’s value)

6] Particular Risk (Does not affect the entire community)

7] Pure Risk

What are Actuaries?

 

Actuaries are professionals who design Insurance plans and evaluates the financial risks to the company that sells that Insurance plan.

The Singapore Actuarial Society was set-up in 1976.

Captive Insurers

 

Captive Insurers are set-up to write the risks of its related companies.

Usually subsidiaries of large MNCs, the advantage of this is that they write only their in-house risks (price is based on their own loss experience), thus minimizing costs of Insurance.

The Insurance premiums are deductible as business expenses thus lowering corporate taxes payable.