Question 1 (10 Marks)

Define the term “risk management” and briefly explain what it entails. Elucidate
your answer with examples.

Risk management is concerned with the identification, evaluation and control of risk.
According to Dorfman, M. S. (1998), risk management is the logical process that firms
and individuals alike, use to deal with their exposure to losses. The risk management
process of identifying, assessing, and prioritizing risks followed by coordinated efforts
to minimize, monitor, and control the probability or impact of unforeseen events. It
aims to protect an organization’s assets and ensure its continued operation.

Components of Risk Management

Risk Identification

Recognizing potential risks that could affect the organization. If for example an insurer
insures a construction company, the various risks that the construction company might
identify risks such as worker injuries, equipment failure, and project delays.

Risk Assessment

Evaluating the likelihood and potential impact of identified risks. The same company
might assess the likelihood of accidents on-site and their potential costs, determining
which risks pose the greatest threat.

Risk Mitigation

Developing strategies to reduce or eliminate identified risks. Implementing safety

training programs for workers to reduce the risk of injuries.

Risk Monitoring

Continuously tracking risks and the effectiveness of mitigation strategies. Regular

safety audits and reviews of incident reports to ensure that safety measures are
effective.

Risk Communication

Ensuring that all stakeholders are informed about risks and the strategies in place to
manage them. Providing regular updates to employees about safety protocols and any
changes in risk management strategies.
Effective risk management helps organizations anticipate potential issues and take
proactive measures to safeguard their interests, ultimately leading to enhanced
stability and resilience (Bay. 1999). By systematically addressing risks, businesses
can minimize losses and improve their overall performance.

Question 2 (5 Marks)

Briefly highlight the role and function of loss adjusters within the insurance
sector.

Loss adjusters are appointed by insurers to manage primarily non-motor insurance

losses on their behalf. They communicate with the client, investigate the loss, and
organize quotations and replacements for goods, among other responsibilities. After
completing their investigation, they provide a report to the insurer with
recommendations for settling the claim. However, they do not have the authority to
settle the loss themselves; they can only make suggestions. Loss adjusters may be
appointed for all claims in excess of R1 500 and if the claim exceeds R1m, a loss
adjustor cannot be appointed before consulting with SASRIA (The Insurance Institute
of South Africa. 2019).

Question 3 (10 Marks)

Highlight the different prescription periods enforced in the handling of

insurance claims.

1. Notification

For non-life insurance policies, policyholders must promptly notify insurers of any
events that could lead to a claim. This notification may need to occur within a specified
timeframe, or as soon as reasonably possible, provided there is a valid reason for any
delay. Failing to meet this requirement can allow insurers to deny the claim. For
example, if a burglary is reported a year after it occurred, the insurer may face
challenges in investigating the incident or assessing the loss.

2. Final Submission of Claim

Policyholders typically have a limited time to submit their claims officially. The standard
period for this submission is generally two years, although some policies may specify
shorter durations.
3. Legal Proceedings

If an insurer rejects a claim, the insured has a limited timeframe to initiate legal action
against the insurer.

4. Recovery from Third Parties

In cases involving recoveries from third parties, a statutory prescription period of three
years usually applies, impacting how long the insured has to seek recovery.

5. Government Claims

When claiming against government entities, such as the SANDF or SAPS, prompt
notification of the intent to claim is required. Prescription periods for these claims can
vary, so seeking expert legal advice is advisable.

Question 4 (5 Marks)

You have insured your house for R2 000 000 with ABC Insurer. You transfer your
bond to another bank and take out insurance on the house with DEF Insurer for
R1 000 000. You do not cancel your insurance with ABC Insurance Company.
The actual value of your house is R2 000 000. A fire breaks out in your house
causing damages of R500 000.

Calculate the amount payable by each insurer. Explain the legal principle that
applies when an insured is insured by more than one insurer for the same
exposure.

Portion payable by ABC

2 000 000
= 3 000 000 x 500 000

= R333 333

Portion payable by DEF Insurer

1 000 000
= 3 000 000 x 500 000

= R166 667

The legal principle at play is the principle of indemnity.

It is possible to insure an asset with more than one insurer. In terms of the insurance
principle of indemnity the insured will however not be allowed to profit from insurance.
The principle of indemnity is enforced by the condition of contribution where more than
one policy is in force for a specific asset.

Question 5 (5 Marks)

An underwriter is requested to underwrite a tyre manufacturing plant. The sums

insured are:

Fire R80 000 000

Loss of profits R40 000 000

The underwriter has a net line of R8 000 000 and can take an additional 50% if
the risk involves Fire and Loss of profit. The underwriter can arrange a nine-line
surplus treaty with a reinsurer. Determine whether the underwriter can accept
the risk without placing facultative or arranging a second surplus treaty.

R
Net Line 8 000 000
Plus 50% for loss of profits 4 000 000
Total net line 12 000 000
Nine lines surplus treaty 108 000 000
Gross retention 120 000 000

Total sums insured:

Fire 80 000 000
Loss of profits 40 000 000
120 000 000
Less: Gross retention (120 000 000)
Facultative required 0

There is no facultative required, the underwriter can accept the risk without placing
facultative or arranging a second surplus treaty.
Question 6 (5 Marks)

Explain three ways in which insurance claim disputes can be resolved.

The following are the ways in which a disputes are resolved according to The
Insurance Institute of South Africa. (2019),

Negotiation

It is the most common way to resolve disputes and it normally involves three parties
which are the insurer, insured and the broker. With the broker involved, negotiations
are held until an amicable agreement between the insured and insurer is reached.

Arbitration

Involves appointing a third party who hears both parts and decides on the fate of the
issue and in insurance the arbitrator is normally appointed to resolve issues of
quantum.

Litigation

It is the costliest dispute resolution means and it is normally used as the last resort by
parties (insured, insurer). In most cases if the insurer denies liability, it normally
remains as the only option for the insured. It involves using the use of legal means.

Question 7 (5 Marks)

Explain how the “law of large numbers” is applied in insurance to reduce risks.

The insurance system works if potential losses and risks can be predicted accurately.
The law of large numbers allows insurers to reduce losses through insurance pools.
Simply put, an increase in the number of policyholders (people who buy insurance)
will strengthen insurance and reduce the probability that the pool will fail (Smith &
Kane, 1994). Thus, the greater the number of predictions of an event based on chance,
the greater is the chance that the actual result will approximate the expected result
(The Insurance Institute of South Africa, 2019). The Law of Large Numbers allows
insurance companies to predict losses more accurately, set appropriate premiums,
and manage risk effectively. This statistical foundation is essential for the sustainability
and profitability of insurance operations.

Question 8 (5 Marks)
Use a numerical example to illustrate the functioning of a quota share
reinsurance treaty and give two reasons why an insurer will agree to such a
treaty.

A 50% quota share would have the following characteristics,

50%/50% quota share treaty

Cession to treaty = 50%

Reinsured retention for his net account = 50%

A R1000 premium would be apportioned as follows:

Reinsurer receives R1000 × 50% = R500

Reinsured retains R1000 × 50% = R500

It is common for an insurer to agree to such a treaty if it is an existing insurer who

branches into another field or for the new class of business or following significant
underwriting losses in which case the insurer may find this is the only type of treaty it
can negotiate (IISA, 2019)
Reference list

Bay, M. (1999). Risk management & insurance.

Dorfman, M. S. (1998). Introduction to risk management and insurance

The Insurance Institute of South Africa. (2019). RSK3701: Risk Financing and Short-
term Insurance. IISA

Smith, M. L., & Kane, S. A. (1994). The law of large numbers and the strength of
insurance. In Insurance, Risk Management, and Public Policy: Essays in Memory of
Robert I. Mehr (pp. 1-27). Dordrecht: Springer Netherlands.