Principle Insurance

Commercially insurable risks typically share seven common characteristics.[1]
A large number of homogeneous exposure units. The vast majority of insurance policies are provided for individual members of very large classes. Automobile insurance, for example, covered about 175 million automobiles in the United States in 2004.[2] The existence of a large number of homogeneous exposure units allows insurers to benefit from the so-called “law of large numbers,” which in effect states that as the number of exposure units increases, the actual results are increasingly likely to become close to expected results. There are exceptions to this criterion. Lloyd's of London is famous for insuring the life or health of actors, actresses and sports figures. Satellite Launch insurance covers events that are infrequent. Large commercial property policies may insure exceptional properties for which there are no ‘homogeneous’ exposure units. Despite failing on this criterion, many exposures like these are generally considered to be insurable.
Definite Loss. The event that gives rise to the loss that is subject to insurance should, at least in principle, take place at a known time, in a known place, and from a known cause. The classic example is death of an insured on a life insurance policy. Fire, automobile accidents, and worker injuries may all easily meet this criterion. Other types of losses may only be definite in theory. Occupational disease, for instance, may involve prolonged exposure to injurious conditions where no specific time, place or cause is identifiable. Ideally, the time, place and cause of a loss should be clear enough that a reasonable person, with sufficient information, could objectively verify all three elements.
Accidental Loss. The event that constitutes the trigger of a claim should be fortuitous, or at least outside the control of the beneficiary of the insurance. The loss should be ‘pure,’ in the sense that it results from an event for which there is only the opportunity for cost. Events that contain speculative elements, such as ordinary business risks, are generally not considered insurable.
Large Loss. The size of the loss must be meaningful from the perspective of the insured. Insurance premiums need to cover both the expected cost of losses, plus the cost of issuing and administering the policy, adjusting losses, and supplying the capital needed to reasonably assure that the insurer will be able to pay claims. For small losses these latter costs may be several times the size of the expected cost of losses. There is little point in paying such costs unless the protection offered has real value to a buyer.
Affordable Premium. If the likelihood of an insured event is so high, or the cost of the event so large, that the resulting premium is large relative to the amount of protection offered, it is not likely that anyone will buy insurance, even if on offer. Further, as the accounting profession formally recognizes in financial accounting standards, the premium cannot be so large that there is not a reasonable chance of a significant loss to the insurer. If there is no such chance of loss, the transaction may have the form of insurance, but not the substance. (See the U.S. Financial Accounting Standards Board standard number 113)
Calculable Loss. There are two elements that must be at least estimable, if not formally calculable: the probability of loss, and the attendant cost. Probability of loss is generally an empirical exercise, while cost has more to do with the ability of a reasonable person in possession of a copy of the insurance policy and a proof of loss associated with a claim presented under that policy to make a reasonably definite and objective evaluation of the amount of the loss recoverable as a result of the claim.
Limited risk of catastrophically large losses. The essential risk is often aggregation. If the same event can cause losses to numerous policyholders of the same insurer, the ability of that insurer to issue policies becomes constrained, not by factors surrounding the individual characteristics of a given policyholder, but by the factors surrounding the sum of all policyholders so exposed. Typically, insurers prefer to limit their exposure to a loss from a single event to some small portion of their capital base, on the order of 5 percent. Where the loss can be aggregated, or an individual policy could produce exceptionally large claims, the capital constraint will restrict an insurers appetite for additional policyholders. The classic example is earthquake insurance, where the ability of an underwriter to issue a new policy depends on the number and size of the policies that it has already underwritten. Wind insurance in hurricane zones, particularly along coast lines, is another example of this phenomenon. In extreme cases, the aggregation can affect the entire industry, since the combined capital of insurers and reinsurers can be small compared to the needs of potential policyholders in areas exposed to aggregation risk. In commercial fire insurance it is possible to find single properties whose total exposed value is well in excess of any individual insurer’s capital constraint. Such properties are generally shared among several insurers, or are insured by a single insurer who syndicates the risk into the reinsurance market.


(Source : wikipedia.org)

FTA set for monday signing

FTA set for Monday signing

By Ian Llewellyn of NZPA

The trade agreement with China is described by diplomats as momentous and matching the CER deal with Australia signed a quarter of a century ago.

After taking full effect it is predicted to benefit New Zealand with a $225 million annual increase in trade and $120 million in tariff savings.

Once the fine print is revealed it is expected to show that most of the big gains for New Zealand will be phased in, with most tariffs on sensitive agricultural products not removed until 2020.

Trade Minister Phil Goff who was always aiming for full elimination of trade barriers said he is "reasonably pleased with the deal".

The average tariff on New Zealand's $1.95 billion of exports to China is between 10 and 20 percent.

The average for New Zealand's crucial agricultural sector is 15 percent with some facing 25 percent price imposts which just end up in China's bulging coffers.

In the future New Zealand exporters will be able to pocket that money or drop their prices to make their products more attractive to China's growing consumer market.

The returns to China are much less and are predicted to be about $80 million a year on the $5.59 billion in goods it sends to New Zealand.

Officials predict the trade imbalance between the two countries will also close with NZ exports growing by up to 39 percent over the next 20 years and China's increasing by 11 percent.

Most of New Zealand's tariffs are on clothes and textiles and are being phased out anyway.

There will also be an increase in the number of Chinese who can work in New Zealand, but Mr Goff said he "never contemplated" the free flow of labour between the two countries and the Chinese were "pretty realistic" about the issue.

The deal for China is strong in symbolism and sends a powerful strategic message to the rest of the Western world.

New Zealand is the first developed country to sign a trade deal with China and it gives Beijing a response when other super-economies such as the United States complain about its heavily protected trade borders.

Critics of China's political system and human rights records have already criticised New Zealand for signing the deal, coming as it does after riots and a clampdown in Tibet, and the build up to the Olympic Games.

Prime Minister Helen Clark has said the deal and human rights are not directly related.

New Zealand will continue to raise its concerns about China's human rights record, but it would be counter-productive to cease trade with the world's fastest growing economy.

Mr Goff will sign the deal with his counterpart Chen Deming under the gaze of Miss Clark and Premier Wen Jiabao in the Great Hall of the People on Monday afternoon New Zealand time.

Miss Clark is also accompanied by a large business delegation and diplomats hope the deal will raise New Zealand's profile both in China and internationally and open up new opportunities for trade and investment.

The deal is described by diplomats as the most significant to be signed anywhere in the world this year.

China is currently New Zealand's fourth largest trading partner, but at current rates of growth will be third in a few years time overtaking the United States.

Diplomatic and political ties have always been reasonably cordial and have warmed in recent years as China opened its borders, relaxed many restrictions on its people and memories of the massacre in Tiananmen Square fade.

One diplomat told NZPA that the trade agreement was: "the biggest step in the relationship since diplomatic relations were first established in 1972".

It will also be viewed with interest around the world because of China's growing influence throughout the world.

New Zealand's other major trading partners such as the United States, Europe and Japan have all constantly refused to enter into trade talks with New Zealand.

The deal was first mooted in 2003 and the formal talks took three years to complete.

Source : The National Bussiness Review