Question

Careful Insurers SAOG receive a proposal for insuring a fleet of 100 vehicles consisting of cars, pick-up vans and tourist buses of different ages belonging to Tour Oman a leading travel agency engaged in organizing package tours within Oman. Explain how Careful Insurers SAOG will determine whether to accept this business and if yes on what terms.

Your answer should include detailed justification for your decision.

some information.

When evaluating applicants, underwriters determine whether insurance on the applicant will be:

rejected;

issued on a substandard basis;

issued on a standard basis;

or issued on a preferred basis.

Issuing Policies on a Substandard Basis The insurer generally has three basic options when it offers a substandard policy issue to an Applicant. It may: issue the policy with a higher premium than would be required for a standard policy/ issue the policy with limited benefits / issue the policy with certain exclusions

Answer 1

Insurance is a contract between two parties which requires atmost good faith towards each other. The insurer and the insured must disclose all material facts clearly, correctly and completely.

The basis of all insurance is Principle of Indemnity. It means a guarantee or assurance to put the insured in the same position in which he was immediatlly prior to the happening of the uncertaqin event. The insurer undertakes to make payment of actual loss incurred by the insured.

The insurance contract is signed only for getting protection against unpredicted financial losses arising due to the future uncertainties. Insurance contract is not made for making profit out of the future uncertainties. Compensation is paid in proportion to the losses incurred.It is limited to the amount assured or the actual loss , whichever is less.

Considering the above primary information we can say that Careful Insurers SAOG should accept the insurance proposal of 100 fleets of various vehichles of a leading travel agency Tour Oman which is using its vehicles for inter Oman transport.

Now let us discuss on what terms the Careful Insurers SAOG should accept the business proposal to insure the fleets of vehicles of Oman Travels as under ---

As per the basic principles cited above the entire proposal can be calssified in three different groups as per the prevelent practices in Insurnce Business --------

The entire 100 vehicles can be classifed into 1] Standard basis ( normal risk ) 2] Substandard basis ( abnormal risky or more risky) and 3] Preferred basis ( elit/ less risky)

Now let us discuss each calssification in detail as below ---

Standard basis :- Under this as explained above the normal risk vehicles will come. So particularly those vehicles whose age is 5 years to 10 years will come in this catagory. Due to age there will be problems of repairs and risk of accidents will be there , So while setting the premium for such vehicles the Careful Insureres SAOG should charge higher premium than Preferred basis. Even in case of buses the SAOG should put the buses above 5 years for Substandard basis as the repairs cost and chances of accidents will be more for buses than cars and vans.

Substandard basis :- It means more risk catagory . Here the risk of loss will be more due to heavy repairs and accidents due to high age of vehicles say more than 5 years for buses and more than 10 years for cars and vans.Here the SAOG should charge highest premium due to high risk factor. Even the SAOG have options like not to cover accident insurance for such catagory or if possible sharing the risk by reinsurance to other companies. This catagory is most critical and needs to analysed very carefully and meticulously to avoid future losses.

Preferred basis :- It is the least risk catagory. Normally less premium is charged for such catagory due to less risk involved. It will include latest vehicles with less age having less repairs and accident chances.

In the above way the SAOG should calssify carefully all 100 vehicles to minimise the risk of loss to it.