3. Evaluation of performance in claims Settlements: vi) Examining statistical indicators over a period of time. vii) Examining arithmetic mean of amounts paid per claim viii) Settlement time evaluation ix) Examining loss verses Estimates and their relationship to actual payment made. x) Look at the incidence of litigation. xi) Carrying out claims audit. Compliance with procedures Adequacy of documentations Verification of claims. 177
Appropriate ness of settlement amount. Recognition of salvage and subrogation possibilities. Promptness of recovery. Loss reporting times Adequacy of legal defense 16.5 Computation of Premiums (Property Insurance) Components of a premium Pure or Net Premium The actual cost of coverage Calculated by looking at the estimated future loss (claims) divided by the units exposure. Pure Premiums- = L V Where L L = Loss V = Volume of units insured Gross Premium The price changed for covering a particular risk. Gross premium – Pure Premium + Expenses + Profit. OR Pure Premium (1-Expenses Ratio) Example: Assume that you have 10,000 units of houses in Kayole Nairobi which you want to insure. Your expectation of loss through fire during the year is Kshs. 75,000,000/-. The industry expenses ratio experience is 30%. It is expected that a profit margin of 15% of net premium is to be realized. Pure Premium = 75,000,000 = Kshs. 7,500/- 10,000 178
Gross Premium = 7,5000 + Profit = 10,714.30 + 1,607.15 1-0.3 = Kshs. 12,321.45 16.6 SUMMARY In this lecture we have been able to see and understand the process of underwriting. This is a process where we select, classify and rate risks. It is so important that it requires prudent judgment so that we do not experience adverse selection. The lecture also touched on the subject of claims administration. We saw that an effective claims department can also act as a public relation tool for the company. The manner in which it handles claims may lead to a repeat sell or loss of customers. We also went through the process of preparing a claim. Certain collaborative information is required before a claim is paid. We were also able to learn the elementary process of premium determination. We saw that a premium is the price charged for covering a specific risk. There are two basic components of a premium viz. pure premium and gross premium. It is important to understand what makes the gross premium. 16.7 Activity
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