Principles of Risk and Insurance
You must choose one question from Topic 5 (question 1 or 2) and one question from Topic 6 (question 3 or 4). You will be answering a total of twoquestions for this assignment.
Topic 5: Choose one from question number 1 OR 2
Topic 6: Choose one from question number 3 OR 4
Topic 5 Questions
1.A group of investors are discussing the formation of a new property and liability insurer. The proposed company would market a new homeowners policy that combines traditional homeowner coverages with unemployment benefits if the policyholder becomes involuntarily unemployed. Each investor would contribute at least $100,000 and would receive a proportionate interest in the company. In addition, the company would raise additional capital by selling ownership rights to other investors. Management wants to avoid the expense of hiring and training agents to sell the new policy and wants to sell the insurance directly to the public by selective advertising in personal finance magazines. (Total of 50 points)
a. Identify the type of insurance company that best fits the above description. (25 points)
b. Identify the marketing system that management is considering adopting. (25 points)
- 2.A newspaper reporter wrote that “Lloyds of London is an association that provides physical facilities and services to the members for selling insurance. The insurance is underwritten by various syndicates who belong to Lloyd’s.” Describe Lloyd’s of London with respect to each of the following? (Total of 50 points)
a. Liability of individual members and corporations (20 points)
b. Types of insurance written (20 points)
c. Financial safeguards to protect insureds (10 points)
3.Delta Insurance is a property insurer that entered into a surplus-share reinsurance treaty with Eversafe Re. Delta has a retention limit of $200,000 on any single building, and up to nine lines of insurance may be ceded to Eversafe Re. A building valued at $1,600,000 is insured with Delta. Shortly after the policy was issued, a severe windstorm caused a $800,000 loss to the building. (Total of 50 points)
a. How much of the loss will Delta pay? (20 points)
b. How much of the loss will Eversafe Re pay? (10 points)
c. What is the maximum amount of insurance that Delta can write on a single building under the reinsurance agreement? Explain your answer (20 points)
4.Liability Insurance Company writes a substantial amount of commercial liability insurance. A large construction company requests $100 million of liability insurance to cover its business operations. Liability Insurance has a reinsurance contract with Bermuda Re that enables the coverage to be written immediately. Under the terms of the contract, Liability Insurance pays 25 percent of the losses and retains 25 percent of the premium. Bermuda Re pays 75 percent of the losses and receives 75 percent of the premium, less a ceding commission that is paid to Liability Insurance. Based on the preceding, answer the following questions: (Total of 50 points)
a.What type of reinsurance contract best describes the reinsurance arrangement that Liability Insurance has with Bermuda Re? (20 points)
b.If a $50 million covered loss occurs, how much will Bermuda Re have to pay? Explain your answer. (20 points)
- Why does Bermuda Re pay a ceding commission to Liability Insurance? (10 points)
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