1 - Fundamental Principles of Insurance

Question 1

What is the best definition of Insurance being a risk transfer mechanism?

Answer 1

Moving the financial impact of a loss to insurers.

Question 2

What is the name for someone who removes risk where possible?

Answer 2

Risk-Averse

Question 3

What is the name for someone who feels happier maximising their risk?

Answer 3

Risk-Seeking

Question 4

Give three reasons why Risk Management is important:

Answer 4

1. Reduces potential for loss
2. Shareholder confidence regarding business management
3. Disciplined approach to quantifying risk

Question 5

What is the definition of risk management?

Answer 5

The identification, analysis and economic control of those risks which can threaten the assets or earning capacity of an enterprise.

Question 6

What are the three stages of risk management?

Answer 6

Identification
Analysis
Control

Question 7

Why is elimination of risk difficult?

Answer 7

Whilst effective, it can be expensive and impracticable.

Question 8

A factory installing sprinklers into its premises is an example of?

Answer 8

Risk Control

Question 9

What is the pattern of losses for the aviation industry?

Answer 9

Low Frequency, High Severity

Question 10

What is a pure risk?

Answer 10

Where there is a possibility of a loss, but no chance of gain.

Question 11

What is a speculative risk?

Answer 11

Where there is a chance of making a gain, as well as a loss.

Question 12

Why is the chance of winning the lottery uninsurable?

Answer 12

You cannot insure risks where there is a chance of making a gain.

Question 13

What is a fundamental risk?

Answer 13

A risk that occurs on such a vast scale that they are uninsurable.

Question 14

What is a particular risk?

Answer 14

Localised or personal events you can acquire insurance for.

Question 15

Which three types of risk are uninsurable?

Answer 15

Non Financial, Speculative & Fundamental.

Question 16

Which key insurance term is used to define something which is neither expected nor intended?

Answer 16

Fortuitous event.

Question 17

What does the term ‘homogeneous exposures’ mean?

Answer 17

The risks are similar to those seen before.

Question 18

What is the pooling of risk?

Answer 18

The basic concept of insurance - the losses of the few are met by the contributions of the many.

Question 19

What is the definition of Peril?

Answer 19

That which gives rise to a loss.

Question 20

What is the definition of Hazard

Answer 20

That which influences the operation or effect of the peril.

Question 21

What is a physical hazard?

Answer 21

The physical characteristics of the risk, including any measurable dimension of the risk.

Question 22

What is a moral hazard?

Answer 22

The attitude and behaviour of people bringing about risk.

Question 23

What are the primary reasons for insurance?

Answer 23

1. Spreading risk
2. Providing a degree of certainty
3. Transferring Risk

Question 24

How would you best describe the loss of something that has sentimental value?

Answer 24

A non-financial Loss

Question 25

What best describes the difference between peril and hazard?

Answer 25

Peril causes the loss and hazard can possibly make it worse.

Question 26

How does a speculative risk differ from a pure risk?

Answer 26

A pure risk is one where there is no possibility of a positive outcome.

Question 27

How do insurers charge clients fair premiums?

Answer 27

By pooling risks.

Question 28

Which insurance is compulsory in the UK?

Answer 28

1. Third party motor
2. Public liability for riding establishments
3. liability insurance for dangerous animals
4. PI Insurance