DEPARTMENT OF STATISTICS & ACTUARIAL SCIENCE
STAT 356: LIFE INSURANCE & RETIREMENT PLANNING
INTERIM ASSESSMENT TEST 1 MARKING SCHEME
1. Insurance may be defined as risk transfer achieved through risk pooling. It can also be
seen as the pooling of fortuitous losses by transfer of such risks to insurers, who agree to
indemnify insureds for such losses, to provide other pecuniary benefits on their
occurrence, or to render services connected with the risk. Defined in another way,
Insurance is a means to manage a contingent loss through which responsibility for a risk
is transferred to another party in exchange for payment before the loss. 4marks
2. From the standpoint of the insurer, the insurance mechanism involves application of the
principle of mutuality or risk pooling. The essence of this principle lies in the creation of
a common (pooled) Fund into which the contributions of premium received from
numerous individuals are poured. Drawings from the Fund are used to pay for individual
claims. 5marks
3. Uninsurable Risks refer to those events which Insurance Companies will not cover. An
Uninsurable Risk is a risk that Insurance Companies cannot insure (or are reluctant to
insure) no matter how much you pay. Common uninsurable risks include: Reputational
Risk, Regulatory Risk, Trade Secret Risk, Political Risk, and Pandemic Risk. 5marks
4. The Property & Casualty Insurance provides coverage that protects against property
losses such as to a home, car or other property, while also providing liability coverage to
help protect policyholders if found liable for an accident that causes injuries to another
person or damage to another person's belongings. Property and Casualty Insurance can
also cover the medical expenses of individuals involved in accidents, as well as
restitution or repair of damaged property. Property and Casualty Insurance policies can
cover several property types – such as Aviation Insurance, Marine Insurance. 7marks
5. Fraudulent Claims: Another cost of insurance comes from the submission of fraudulent
claims. Examples of fraudulent claims include the following:
➢ Car accidents are faked or staged to collect benefits
➢ Dishonest claimants fake slip-and-fall accidents
➢ Fake burglaries, thefts or acts of vandalism are reported to insurers 3marks
Inflated Claims: Another cost of insurance relates to the submission of inflated claims.
Although the loss is not intentionally caused by the insured, the amount of claim may exceed the
actual financial loss. Examples of inflated claims include the following:
➢ Lawyers sue for high liabilities that exceed the true economic loss of the victim.
➢ Insureds inflate the amount of damage in car-collision or damage claims. 3marks
6. Term Insurance pays a lump sum benefit on the death of the policyholder, provided
death occurs before the end of a specified term. Term insurance allows a policyholder to
provide a fixed sum for his or her dependents in the event of the policyholder’s death.
5marks
7. A proposal form is the primary document in the proposal or application for insurance. It
identifies the life being proposed for insurance coverage and specifies the amount and
type of coverage. It also provides the basic information relevant towards determining the
insurability of the life proposed. 4marks
8. The standard policy document typically has three parts namely;
 The Policy Schedule
 The Standard Provisions
 The Specific Provision 3marks
9. Riders are modifications to the insurance policy, added at the same time the policy is
issued. The riders change the basic policy to provide some feature desired by the policy
owner. A common rider is accidental death, which used to be commonly referred to as
‘double indemnity’ which pays twice the amount of the policy face value if death results
from accidental causes, as if both a full coverage policy and an accidental death policy
were in effect on the insured. Another common rider is premium waiver, which future
premiums if the insured becomes disabled. 9marks
10. A reversionary annuity is contingent on two lives, usually a couple. One is designated
as the annuitant, and one the insured. No annuity benefit is paid while the insured life
survives. On the death of the insured life, if the annuitant is still alive, the annuitant
receives an annuity for the remainder of his or her life. 5marks
11. Underwriting or selection of life risks is the process of evaluating each proposed life in
terms of the degree of risk it represents and then deciding whether to grant insurance, and
on what terms. It begins with the laying down of a broad standard for lives to be insured
at tabular rates of premium.
The purpose of underwriting or selection are two-fold: to prevent anti-selection, and to
differentiate, classify and promote equity among risks. 5marks
12. Anti-selection is the tendency of people, who suspect or know that they have a more than
average chance of experiencing loss, to apply for or renew their insurance to a greater
extent than would have been the case if they had lacked such knowledge. 5marks
13. There are two different types of claims – maturity claims and death claims.
When a policy matures, it becomes the subject of a maturity claim; and on every
maturity claim, the company’s form of discharge must be signed by the person with legal
title to the policy. The form of discharge will provide for the signature of a witness.
Production of policy document will be required as proof of title.
Death claims will normally be initiated by the claimant or solicitors for the estate. Proof
of death is vital for admission of a death claim, and this is normally done by an official
death certificate. 8marks
14. • Coverage is in force
• The contingency has occurred
• The age of the life insured is correct
• The claiming party has a right to the proceeds, and
• The claiming party is in a legal position to release the insurer from liability. 5marks
15. A facultative reinsurance contract, the life insurer is free to offer any risk for
reinsurance, and the reinsurance is free to assume it but a treaty reinsurance contract, it
is agreed beforehand that the insured will cede, and the reinsurer will assume, all risks
insured by the insurer that come within the terms of the reinsurance contract. 4marks