Chapter 1 Flashcards
What is “Risk Perception”
An individual’s perception of a particular risk
For Example: a lot of people will be more concerned about the risk of being involved in an
airplane crash than the possibility of a serious road traffic accident, even though the risk of
the latter occurring is significantly higher. This can in part be explained by the element of
control involved in driving, and therefore the perception that the individual has control over
the outcome.
However, someone that has recently been involved in a motor accident may in fact have
an inflated view of the risk of it occurring again, as a result of their own personal
experience.
What are these all describing?
• 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).
Risk
What does insurance do for people?
In terms of “risk”
Risk Transfer
What are the three term’s for “risk” used in the insurance marketplace?
- The peril
- The thing (or liability)
- The underwriter will mean both the thing insured, such as the property itself
What type of person is keen to remove risk where possible?
Risk-adverse
What type of person is happy to carry certain risk themselves?
Risk-seeking
What does AIRMIC stand for?
Association of Insurance and Risk Managers in Industry and Commerce (Airmic)
What are the three main reasons commercial risk management is important?
Reduces the potential for loss by identifying and managing hazards.
Gives shareholders a greater degree of confidence in a company’s ability to manage its risks.
It provides a disciplined approach to quantifying risks.
What are the three key steps in the risk management process?
Risk Identification
Risk Analysis
Risk Control
What does risk identification look at?
Previous threats
Potential threats
What three aspects are there to controlling a risk?
Physical control measures
Financial control measures
Developing a good risk culture
What is a physical control measure?
Putting specific locks on the doors of a factory to reduce the theft risk
What is an example of a financial control risk?
Transferring the risk by either taking out insurance or by contract (e.g.
arranging for a security firm to accept responsibility for cash whilst in its control).
How do you achieve “ developing a good risk culture” ?
This can be achieved by
educating employees or clients on how to avoid or reduce risks.
What are the three main ways internal controls are categorized?
Detective controls
Corrective controls
Preventative controls
What do “detective controls” do?
They detect errors or irregularities that may have occurred.
What does “corrective controls” mean?
Corrective controls correct errors or irregularities that have been detected.
What does “preventative controls” mean?
Preventative controls keep errors or irregularities from occurring in the first place.
What has The National Cyber Security Centre been central to developing?
The development and research that is used to manage cyber risks.
What does FPA stand for and what kind of work do they do?
Fire Protection Association (FPA).
new materials
methods of construction
Set rules for construction
• providing rules for the construction, installation and operation of fire extinguishing
appliances, e.g. sprinkler systems
What does Thatcham Research Centre do?
Test vehicle safety and security systems, and for testing seats for whiplash protection.
What does MIAFTR stand for?
Motor Insurance Anti-Fraud and Theft Register
(MIAFTR)
What does ABI stand for?
Association of British Insurers (ABI)
What did the MIAFTR and ABI aim to combat together? and how?
Fraudulent claims.
Create a register of all vehicle that has become a total loss and makes the information available to all companies. Also making vehicle records such as registered address available .
What are three other examples of companies that aim to reduce motor insurance fraud?
Claims and Underwriting Exchange (CUE),
National Fraud Database,
Insurance Fraud Register.
What does LPRC stand for? and who are they?
Loss Prevention Research Council
They conduct risk-based research and other initiatives to help insurers to develop crime- and loss-control solutions.
What are the three components of risk?
uncertainty;
level of risk;
peril and hazard.
Refine Uncertainty?
Uncertainty about the future is at the centre of risk. If we always knew exactly what was
going to happen, there wouldn’t be any risk. Because we don’t, we can’t be certain of
anything.
Define what is meant by “level of risk”?
Risk is assessed by insurers in terms of frequency (how often something might happen) and severity (how costly it would be if it did happen) and thus the level of the risk is determained and what cost that should be priced at.
What is a peril?
What is a hazard?
A peril can be defined as that which gives rise to a loss.
A hazard can be defined as that which influences the operation or effect of the peril.
EXAMPLE:
Consider someone smoking a cigarette in a house that’s insured against fire. Drop the
cigarette and it could start a fire. The fire itself is a peril. The act of smoking in the house is
the hazard – it affects the likelihood of a fire in the house.
Dishonesty, lightening, collision, explosions are all examples of a peril or hazard?
Peril.
Give an example of a physical hazard?
Security at a shop
Construction of a property
Age of a proposer and type of car driven (motor insurance)
Carlessness, dishonesty, social attitudes are examples of what hazard?
Moral
Moral hazard arises from the attitude and behaviour 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
Careless or lax management in a factory is am example of?
A poor moral Hazard
A fireworks factory is inspected by insurers and found to have excellent safety
protocols and good training for the staff. What are the protocols and training
examples of?
Good moral risk
What are the three categories of risk within a general insurance context?
Financial risks
Pure risks
Particular risks
What is a financial risk?
Outcome is measurable in financial terms
EXAMPLE:
1. Accidental damage to a motor car: the financial value of the risk is the cost of repairing
or replacing the vehicle.
2. Loss of business profits following a fire: this risk is measurable since comparisons
can be made to similar trading periods to devise a fair estimate of the loss to be paid by
the insurer as compensation.
What is a pure risk?
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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.
EXAMPLES:
• The risk of fire: it could damage or destroy property or cause an interruption to the running of the business, both are measurable in financial terms.
• The risk of machinery breakdown: this could lead to actual damage or business interruption.
• The risk of injury to employees at work: if such injury is caused by the negligence of the company, a court may award damages and costs. These are measurable in financial terms.
What is a particular risk?
Particular risks are localised or even personal in their cause and effect. Sometimes the cause may be more widespread (e.g. a storm over a whole region), but the effect is localised or even related to an individual. Not all properties in the region will have been damaged.
EXAMPLE:.
A factory fire: this would cause localised damage to the factory and possibly to its
surroundings, but would not affect the whole community.
What features must be present for a risk to be insurable? (3)
- The event insured against must be fortuitous
- There must be insurable interest
- the risk must not be against public policy
What is a fortuitous event?
An occurrence that is accidental or unexpected.
A non-fortuitous loss is a policyholder who deliberately damages their car
What does Insurable interest present mean?
The Legally recognised financial relationship between the insured and the object or liability that is being insured.
For example, you can insure against the theft of your own car because you suffer financial loss if it is stolen.
An is an example of something people would wish to insure against but it would be against public policy?
Insurance against a criminal fine.
What is a homogeneous exposure?
Law of large numbers, a lot of data based on similar risks is homogenous exposures.
What three types of risks cant be insured?
• non-financial risks;
• speculative risks; and
• fundamental risks.
What is a non-financial risk?
A non-financial risk is one where the outcome is not measurable in monetary terms. No value can be placed on the outcome.
EXAMPLE : Choosing a new house, Deciding on a school for a child, Loss of enjoyment of a holiday
What is a speculative risk?
Associated with gambling.
Speculative risks may involve three possible outcomes; loss, break-even or gain
Voluntary risks taken in the hope of a gain but knowing there is a good chance of a loss.
What is a fundamental risk?
Fundamental risks are those which arise from a cause outside the control of any one individual or group of individuals and their effects are usually widespread.
EXAMPLES:
1. economic recession(unless under something like an unemployment insurance) ;
2. war;
3. earthquake (in the Uk as low change of earthquake)
4. famine
Explain the benefit of insurance - “improved cash flow”
Businesses’ money does not have to be kept in reserve for potential losses, which frees up capital and therefore improves cash flow.
Explain the benefit of insurance - “Expansion of buisness”?
Enterprise is encouraged, since insurance makes it easier for new businesses to start or for existing businesses to invest, innovate and expand and protect risks while doing so.
Explain the benefit of insurance - “Loss Control” for both the insurer and the policy holder?
For the insurer: the are invested in reducing claims and helping policyholder with that to improve there own profit
For the policyholder: they will suffer less business interruption and consequential inconvenience as the effects of the
losses being minimised or ideally, not occuring at all.
Explain the benefit of insurance - “Premiums Invested”
Premiums can be invested to earn interest. Money is held until claims have to be paid
What is a ‘premium reserve’.?
The time between premiums being paid and when claims have to be paid
What are the Social benefits of insurance?
Encouraging business activity and keeping people employed
Covering business interruption which includes wages and loss of trading income to aid with the recovery.
What is the pooling of risks? What is the purpose of a pool?
The basic principle of insurance is that the losses of the few are met by the contributions of the many.
Insurer gathers premiums of similar risks paid by many and adds it to a common pool.
Out of the common pool premiums are paid
How do insurers predicted the final cost of claims in any one year fairly confidently?
Law of large numbers, law of average
What does equitable premiums mean?
Equitable premiums are the premium paid based on a fair contribution to the pool, this is decided taking into account the
different elements of risk brought to the pool by each of the policyholders and a fair contribution base on what risk you bring is decided. This is an equitable premium.
When pooling risk, insurers use the law of large numbers to make reliable what?
Claims payment predictions
What does CJEU stand for?
Court of Justice of the European Union
What did the CJEU rule and in what year?
In 2011 they rules insurers could no longer use gender as a premium calculation tool.
Where are Test-Achats from?
Belgium consumer group
When did insurers have to change there pricing models following the CJEU gender ruling?
by 21 December 2012
The EU Gender Directive was transposed into UK law under what name?
Equality Act 2010 (Amendment) Regulations 2012
What classes of insurance does the Equality Act 2010 (Amendment) Regulations 2012 affect?
- Motor
- Life
3.PMI - Income protection
- Annuities
What is co-insurance? and what two types if ci-insurance are used in the insurance market?
The insurer deems the risk to large for them to take on so they either have to decline the risk or share the risk which is done by co-insurance. By one of two methods:
1.risk sharing between insurers; and
2. risk sharing with the insured
Explain the difference between: risk sharing between insurers and risk sharing with the insured?
With the insurers, multiple insurers covering different percentages of a risk until the full risk is covered.
The insured agreed to cover a portion of the risk, normally know as the excess or deductible.
What is dual insurance?
Where two or more policies are in place covering the same risk
What is self-insurance?
An individual or company has decided not to use insurance as the risk transfer mechanism, but to carry the risk themselves
What are the two classes of insurance?
- Personal lines
- Commercial lines
What are the 5 types of heath insurance relating to personal health?
- Personal accident
- Sickness
- PMI
- Short term income protection
- Critical illness
What is PPI?
Payment protection insurance - designed to cover monthly loan and credit card payments
What are the 5 liability insurances?
- Employers’
- Public
- Products
- D and O
- Professional
What is covered under “Perils and ‘all risks’ policies”
Material Damage
What is covered under a glass policy?
Destruction of or damage to all fixed glass (and may be extended to include lettering on glass), on an ‘all risks’ basis
What is Pecuniary insurance?
Pecuniary means ‘relating to money’
What are the 6 types of Pecuniary insurance?
- Fidelity guarantee
- Legal Expenses
- Credit
- Business Interruption
- Political Risk
- Guarantee Asset protection
What does Fidelity guarantee cover?
Covers the risk of losing money or stock, by the fraud or dishonesty of a person holding a position of
trust.
What does Credit insurance cover??
Covers businesses against the risk of nonpayment, whereby the seller ensures that if their debtors (buyers) fail to meet
their obligations, the seller can recoup their losses.
What is political risk insurance?
Insurance that can be taken out by businesses against the risk that revolution or other political conditions will result in a loss.
What is Guaranteed asset protection also known as and what does it cover?
GAP Insurance - cover’s the ‘gap’ between the amount paid out by a motor insurance policy and the amount still to be repaid on the finance that was taken out to buy the vehicle (where that amount was larger).
What three areas does marine insurance cover?
physical damage to the ship or goods (cargo),
liabilities incurred to other parties
loss of income.
What does Marine hull insurance cover?
Covers physical damage to the ship, its machinery and equipment and some limited liability insurance in case of contact with other vessels.
What does marine cargo insurance cover?
loss or damage to goods.
What does marine freight insurance voer?
the sum paid for transporting goods or for vessel hire
What three areas does aviation insurance cover?
both loss of or damage to the aircraft (hull)
legal liability to third parties and passengers (liability)
Satellite
What is a combined or packaged insurance policy?
one that brings together a number of different types of cover or a range of risks/perils under one policy
What are two examples of Combined or packaged policies?
Commercial package or Commercial combined
What is the difference between Commercial package and Commercial combined?
Commercial package is a package policy for a specific trade such as a hairdresser
Commercial combined is a package where you select what is covered
