St.

Mary’s University

Department of Marketing Management

Risk Management and Insurance: Group Assignment

Section p

By

Bethel Legesse RMKD/2066/2013

Behulum biruk RKMD/2065 /2013
Biruk Girma RMKD/4549/2013
Hana Masresha RKMD/2077/2013
Hermela Fikadu RKMD/4513/2013
Yabsira Taye Metaferia RKMD/1715/2013
Yabtsega Behailu RKMD/2108/2013

Section p

To
Dereje Tarekegn

June 2023

SMU

Addis Ababa
 I. Part : Review Questions

6. What is underwriting? Identify the sources of underwriting information?

Underwriting is the process through which insurance companies evaluate and select risks for
coverage. This involves assessing the likelihood of catastrophic events and calculating the level
of risk that the policyholder poses. The goal is to ensure that the premiums charged accurately
reflect the level of risk associated with a particular policy. This process may involve examining
information such as the applicant's medical history, credit score, driving record, and other
relevant data.

The sources of underwriting information include the applicant's personal history, which may
include age, occupation, hobbies, past claims experience and lifestyle. Additionally, other
sources of information include databases of insurance claims, credit information, medical
records, driving records, and other publicly available information. Insurers may also gather
information from third-party providers or conduct inspections. Each of these sources will help
the insurer to build a comprehensive profile of the applicant and identify the risks posed.

7. List and briefly explain general information required for granting life insurance Policy

The general information required to grant a life insurance policy includes:

1. Age: The age of the policyholder is a key factor in determining the premium rates as it affects
the risk that the policyholder may pass away during the term of the policy.

2. Health: The health of the policyholder is another important factor that determines the
premium rates. The insurer may require a medical examination or review of the applicant's
medical history to evaluate their health.

3. Lifestyle: The insurer may also consider the policyholder's lifestyle choices, such as smoking
or drinking, and other risky habits that may increase the likelihood of death.

4. Occupation: The nature of the policyholder's work and associated risks is also evaluated
when granting life insurance policies.

5. Income: The income level of the policyholder can also influence the premium rates, as it can
affect the coverage amount and the ability to pay the premium.
6. Family history: A family history of medical conditions or early death may also be considered
when granting life insurance policies.

7. Hobbies/Recreation: Activities that may pose a risk, such as extreme sports or hazardous
hobbies, may be factored into the premium rates.

8. Explain claim settlement and steps involved in it

Claim settlement is the process of resolving a claim made by the policyholder or their
beneficiary, who seeks to receive the policy benefits under their life insurance policy. The
following are the steps involved in the claim settlement process:

1. Claim intimation: The policyholder or beneficiary must inform the insurer immediately after
the death of the policyholder. They need to submit a written intimation to the insurer along with
necessary documents, such as a death certificate, policy document, and identity proof.

2. Document verification: After receiving the claim intimation, the insurer will verify the
submitted documents to check their authenticity. The insurers will cross-check the details
mentioned in the claim form with the policy terms and conditions.

3. Investigation: If required, the insurer may also conduct an investigation to verify the claim
details. This investigation may include contacting medical authorities or law enforcement
officials to understand the cause of death and other relevant details.

4. Claim assessment: Based on the submitted documents and investigation findings, the insurer
will assess the claim and determine the payable amount.

5. Claim settlement: Once the claim is assessed, the insurer will communicate the claim
settlement amount to the policyholder or beneficiary. The insurer will then settle the claim by
issuing a payment, either as a lump sum or in installments, depending on the policy terms and
conditions.
9. Explain how the insurance contract for life insurance differs from other insurance
contracts?

Life insurance contracts differ from other insurance contracts in several ways. The main
differences are as follows:

1. No Indemnity: In most insurance policies, the insured is indemnified for losses that are
sustained due to an unforeseen event. However, in life insurance policies, there is no indemnity
as the policyholder cannot be compensated for their life. Instead, the policy provides a
predetermined sum of money to the beneficiary upon the death of the policyholder or upon
maturity of the policy.

2. Long-term policy: Life insurance policies are typically long-term policies that provide
coverage for the entire life of the policyholder or for a specific period, such as 10, 15, 20 or 30
years. This is different from other insurance policies, such as health insurance or car insurance,
which usually provide coverage for a shorter duration.

3. Fixed Premiums: In most life insurance policies, the premiums are fixed and cannot be
changed for the duration of the policy. In other insurance policies, such as health insurance, the
premiums can change as per the age and health conditions of the insured.

4. Investment Component: Many life insurance policies have an investment component, which
allows the policyholder to invest in various investment options for a potential increase in value.
This is not typically found in other insurance policies.

5. Underwriting Process: The underwriting process for life insurance policies is much more
complex than other insurance policies, as it involves risks related to the policyholder's health,
lifestyle choices, and medical history. Insurers often require medical tests and examinations to
determine the policyholder's risk and the premiums charged.
 10. Explain the meaning of premature death

Premature death is the death of an individual at a relatively young age, typically before their
expected age of death based on their lifestyle, medical history, and family history. The age at
which death is considered premature varies depending on factors such as location, demographic
group, and historical period. Generally, any death that occurs before the age of 65 is considered
premature in most developed countries. Premature death may be caused by a variety of factors,
including genetic predisposition to certain diseases, lifestyle choices, such as smoking or
unhealthy eating habits, accidents, illnesses such as cancer or heart disease, or a combination of
these factors. The loss of life due to premature death can have a significant impact on the
individual's family, friends, and community, both emotionally and financially.

I. Part : Application Questions

4. Risk managers use a number of methods for managing risk. For each of the following,
what method for handling risk is used? Explain your answer

A) For the risk of premature death due to a heart attack, life insurance is an appropriate technique
to manage the risk as it provides financial support to the family of the deceased in case of
unexpected death.

B) For the risk of a home being destroyed in a hurricane, property insurance can be used to
manage the risk by providing financial compensation to repair or rebuild the home.

C) For the risk of a new car being damaged in an auto accident, purchasing comprehensive auto
insurance can manage the risk by providing financial protection against damages or loss caused
by an accident.

D) For the risk of being ordered to pay a substantial liability judgment in an auto accident,
liability insurance can be used to manage the risk by providing financial protection against
damages or injury caused to others in an accident.

E) For the risk of being sued for medical malpractice, medical professionals can purchase
medical malpractice insurance to manage the risk by providing financial protection against legal
claims for negligence or malpractice.
5. Buildings in flood zones are difficult to insure by private insurers because the ideal
requirements of an insurable risk are difficult to meet.

A) Identify the ideal requirements of an insurable risk.

The ideal requirements of an insurable risk are:

1. The risk should be definite and measurable.

2. The risk should be large enough to cause financial loss.

3. The risk should be random and not intentional or predictable.

4. The risk should be spread across a large number of similar risks.

5. The premiums should be affordable and reasonable.

6. The risk should be subject to legal contracts.

B) Which of the requirements of an insurable risk are not met by the flood peril?

The flood peril does not meet certain requirements of an insurable risk:

1. The risk is often not definite and can be difficult to measure accurately, as flood patterns
may change over time.

2. The financial loss caused by a flood may be catastrophic, making it difficult for insurers to
spread the risk across a large number of similar risks.

3. Floods are not entirely random or unpredictable, as certain areas are more prone to
flooding than others.

4. The premiums required to insure against a flood may be unaffordable for some property
owners, which makes it difficult for insurers to find a large pool of similar risks.

5. The risk may be subject to government intervention in terms of floodplain management

and zoning laws, which could significantly impact the ability of insurers to create legal
contracts.
 II. Part : Case Application

2. Hanan is applying for a health insurance policy. She has a chronic liver ailment and other
health problems. She honestly disclosed the true facts concerning her medical history to the
Insurance agent. However, the agent did not include all the facts in the application. Instead, the
agent stated that he was going to cover the material facts in a separate letter to the insurance
company’s underwriting department. However, the agent did not furnish the material facts to the
insurer, and the contract was issued as standard. A claim occurred shortly thereafter. After
investigating the claim, the insurer denied payment. Hanan contends that the company should pay
the claim because she answered honestly all questions that the agent asked.

A) On what basis can the insurance company deny payment of the claim?

The insurance company can deny payment of the claim on the basis of misrepresentation and
nondisclosure. Misrepresentation occurs when the insured provides false information, while
nondisclosure occurs when the insured fails to provide relevant and material information. In this
case, the insurance agent did not provide complete and accurate information to the underwriting
department, leading to the issuance of a contract that may not have been appropriate for Hanan's
medical situation. This constitutes misrepresentation and could be grounds for denying the claim.

B) What principles can Hanan use to support her argument that the claim should be paid?

Hanan can use the principle of utmost good faith to support her argument that the claim should
be paid. Utmost good faith requires both parties in an insurance contract to provide full and
complete disclosure of all relevant material facts. Hanan honestly disclosed the true facts
concerning her medical history to the insurance agent, fulfilling her obligation of utmost good
faith. The insurance agent, who acts on behalf of the insurer, failed to provide complete
information to the underwriting department, violating the principle of utmost good faith.
Therefore, Hanan may argue that she fulfilled her obligation under the contract, whereas the
insurance company did not.