Chapter 1

Question 1

Risk-seeking

Answer 1

Willing to carry certain risks themselves

Question 2

Risk-adverse

Answer 2

Minimising the risk to which they are exposed - e.g. insurance

Question 3

Which insurance is compulsory for individuals in the UK

Answer 3

Third-Party

Question 4

Function of risk management

Answer 4

Identification -> Analysis -> Control

Question 5

Risk identification

Answer 5

Discovering it’s possible existing and potential future of threats

Question 6

Risk analysis

Answer 6

Risk managers examine passed data to evaluate or analyse the risk

Question 7

Risk control

Answer 7

Some course of action should be put into place to control reduce or even eliminate the risk

Question 8

Components of risk

Answer 8

• Uncertainty
• Level of risk
• Peril & hazard

Question 9

Uncertainty

Answer 9

Implies doubt about the future as a result of being unable to predict what is going to happen

Question 10

Level of risk

Answer 10

Risk relates to the different levels of risk that exist.
We know that there is a greater likelihood of something is happening than others.

Frequency and severity

Question 11

Frequency

Answer 11

How often it will happen

Question 12

Severity

Answer 12

How serious it will be if it does happen

Question 13

Categories of risk

Answer 13

• Financial and non-financial risks
• Pure and speculative risks
• Particular and fundamental risks

Question 14

Pure risk

Answer 14

Where there is the possibility of a loss but not of gain, and where the best that we can achieve is a breakeven situation

Question 15

Speculative risks

Answer 15

Only speculate with a view to making some kind of gain.

E.g national lottery or investing in the stock market

Question 16

Fundamental risks

Answer 16

Some risks that occur on such a vast scale that they are uninsurable. E.g economic recession

They can be defined as those that arise from social. economic, political or natural causes and are widespread in their effect

Question 17

Particular risks

Answer 17

Are localised or even personal in their cause and effect.

E.g. a storm might not affect all houses in the area

Question 18

Insurable risks

Answer 18

Financial - Pure - Particular

Question 19

Features of insurable risks

Answer 19

• Fortuitous event
• Insurable interest
• The risk itself must not be against public policy
• The risk must generally not be a one-off

Question 20

Fortuitous event

Answer 20

It must be accidental or unexpected and not inevitable for the insured.
Certainly not deliberate too!

Question 21

Insurable interest

Answer 21

Is the legally recognised financial relationship between the insured and the object or liability that is being insured.
E.g. someone else cannot insure your car

Question 22

Public policy

Answer 22

Contracts must not be against public policy or go against what society considers to be the right one right thing to do. Insurers should not therefore cover risks that are against public policies.

Question 23

Homogenerous exposures

Answer 23

The risks are similar to those seen before.

A significant number of exposures to similar risks historical patterns and trends will enable an insurer to forecast the expected extent of future losses.

Question 24

Pooling of risk

Answer 24

Gathering money of those insured and sets up pools.
The contribution informal premiums from the menu should go into this pool. From the pool payments are made to compensate the losses of those I have claimed.

Question 25

Law of large numbers

Answer 25

Where there are a large number of similar situations, actual number of events of current events occurring towards expected number. E.g. you would expect to get the same amount of heads or tails after flipping the coin 5,000 times.

Question 26

Equitable premiums

Answer 26

Number of pools to be set up. E.g Car insurance and another pool for property insurance. ^ each insured wishing to join the pool must be prepared to make an equitable (fair) contribution to that pool.

Question 27

Peril

Answer 27

It’s the thing that is being insured against E.g. a fire. Can be defined as that which gives rise to a loss. E.g. lightening - when it occurs, this natural peril can result in damage

Question 28

Hazard

Answer 28

Can be defined as that which influences the operation or effect of the peril. E.g. if a fire broke out (the peril) the lack of sprinklers (the hazard) as it has potential to make the damage worse

Question 29

Physical Hazard

Answer 29

Relates to the physical characteristics of the risk and include any measurable dimension of the risk. E.g. security protection at a shop or age of insured and type of car (motor insurance)

Question 30

Moral hazard

Answer 30

Arises from the attitude and behaviour of people

Question 31

Secondary function of insurance

Answer 31

Ability to enhance the business. - Companies don’t need to set large amounts aside as safety nets. - It allows the business to expand. - Jobs are protected. - Insurers have the opportunity to invest their funds.

Question 32

Compulsory insurance - private individuals

Answer 32

Motor insurance and public liability insurance (in respect of dangerous animals)

Question 33

Compulsory insurance - professions and businesses

Answer 33

Motor insurance and employers liability insurance. Public liability insurance is also compulsory for specific trades/professions. Solicitors and other professionals must have a professional indemnity insurance.

Question 34

Main reasons why certain forms of insurance are compulsory

Answer 34

- To provide funds for compensation - In response to national concerns - Reputation of the professions

Question 35

Database for policies

Answer 35

Employers liability tracing office (ELTO) and insurers have to publish info within 3 months

Question 36

ERN & EL

Answer 36

Employee reference number | Employers liability

Question 37

Primary functions of insurance

Answer 37

- Spreading the risk - Providing the insured with a degree of certainty - Transferring the risk

Question 38

How would you best describe the sentimental value of a piece of jewellery

Answer 38

A non financial risk

Question 39

Explain the difference between Peril and Hazard

Answer 39

Peril causes the loss and Hazard can possibly make it worse

Question 40

Which of the following is not one of the steps involved in risk management: 1. Analysis 2. Control 3. Subrogation 4. Identification

Answer 40

3. Subrogation

Question 41

Which principle states that where there are a large amount of similar situations, the actual amount of events occurring tends towards the expected amount?

Answer 41

The law of large numbers

Question 42

What proportion of the business written in the London Market is from UK based insureds?

Answer 42

25%

Question 43

Risks that occur on such a vast scale that they are uninsurable are called

Answer 43

Fundamental risks

Question 44

What should risk control consider?

Answer 44

1. What is the likelihood of the risk actually happening? | 2. Considering the likely impact

Question 45

What is the minimum required limit of indemnity (Employers Liability Insurance)

Answer 45

£5 Million - although the insurance market provides £10 Million as standard.