1: Core Principles of insurance Flashcards
What is the definition of a ‘risk’?
The possibility of an unfortunate occurrence / Doubt concerning the outcome of a situation / Unpredictability / The possibility of loss / The chance of gain (such as hoped-for benefit from a gamble or investment strategy).
What is the definition of a ‘peril’?
A peril can be defined as that which gives rise to a loss.
What is the definition of a ‘hazard’?
A hazard can be defined as that which influences the operation or effect of the peril.
What is a physical hazard?
A physical hazard relates to the physical characteristics of the risk and includes any measurable dimension of the risk.
What is a moral hazard?
Moral hazard arises from the attitude and behavior of people. In insurance, this is usually the conduct of the insured. Moral hazard also arises from the conduct of the insured’s employees and that of society as a whole.
How are risks assessed by insurers?
By frequency (how often something might happen) and severity (how costly it would be if it did happen)
Give an example of a high frequency and low severity loss.
An example of high frequency and low severity of loss could be motor insurance, which usually entails a large number of small claims, for things like dented bumpers and cracked windscreens.
Give an example of a low frequency and high severity loss.
This describes a small number of events resulting in very high costs, such as aircraft accidents and oil spillages.
Define ‘pure risks’.
Pure risks are those where there is the possibility of a loss but not of gain, and where the best that we can achieve is a break-even situation. Travelling home in a car is a good example. The best that we can hope for is a safe arrival. The possibility exists, however, that there might be an accident and the car damaged or someone injured. It is these types of risk that are generally insurable.
In addition to peace of mind, and the enabling of risk transfer, list 5 benefits insurance brings to policyholders, and to society as a whole.
- Improved cash flow
- Expansion of business
- Loss control
- Premiums invested
- Social benefits
What is ‘risk management’?
Risk management seeks to identify, analyze and control risk.
Risks can be controlled by physical means (taking measures to decrease the likelihood of a feared event happening) or by financial means (transferring the risk to another by insurance or by contract). They can be controlled by improving risk awareness through cultural behavior and training.
What is ‘risk identification’?
Risk identification involves discovering the threats that may already exist, and the potential threats that may exist in the future.
What is ‘risk analysis’?
Risk analysis involves examining past data to evaluate and analyze risk.
For example, they can look at the past loss patterns of, say, motor accidents involving drivers under 25, and so predict what is likely to happen in the future for divers who fall into this category.
Equally, patterns of reported accidents in the accident register may be analyzed for future trends. Insurers will look at many of the same elements when considering the rating of a risk.
What is ‘MIAFTR’? and why was it founded?
Motor Insurance Anti-Fraud and Theft Register
MIAFTR was formed through the participation of Association of British Insurers (ABI) member companies to combat the increasing number of fraudulent claims.
Which of these terms describes an individual who is keen to remove risk where possible?
Risk-averse
