Chapter 1

Question 1

Describe the concept of risk

Answer 1

Possibility of loss

Question 2

What is the concept of risk management

Answer 2

The identification, analysis and economic control of risks

Question 3

Risk transfer mechanism

Answer 3

The acceptance of an unknown future potential risk by the INSURER for an agreed premium

Question 4

Risk Averse

Answer 4

Someone who doesn’t like taking risk

Question 5

Risk loving

Answer 5

Those who like to take risks

Question 6

What is AIRMIC

Answer 6

Association of Risk Insurance Managers

Question 7

Why is Risk Management important (3)

Answer 7

1) Reduces potential of loss
2) Gives shareholders confidence
3) Disciplined approach to quantifying risks

Question 8

Risk Identification

Answer 8

Through carrying out a physical examination or survey.

Question 9

Risk analysis

Answer 9

Risk managers examine past data to evaluate or analyse the risk. Therefore they can predict likely losses in the future.

Question 10

Risk control (2)

Answer 10

1) Physical control - installing sprinklers or an alarm
2) Financial control - making sure contracts are well worded

Question 11

Components of Risk (3)

Answer 11

1) Uncertainty
2) Level of risk
3) Peril

Question 12

Different levels of risk (2)

Answer 12

Severity & Frequency

Question 13

Financial risk

Answer 13

The outcome of adverse events must be capable of measurement in financial terms.

Question 14

Non-financial risks

Answer 14

Those risks which have no financial measurement - family heirloom for example.

Heirloom will not just have market value but also a sentimental value which cannot be measured.

Question 15

Benefit Policies (2)

Answer 15

Personal accident & sickness policies

Question 16

Speculative risks

Answer 16

Possibility to gain - can’t be insured

Question 17

Pure risks

Answer 17

Possibility of a loss but not of gain, and where the best that we can achieve is a break-even situation.

Question 18

Fundamental risk

Answer 18

Risks that occur on vast scale - e.g war

Question 19

Particular risk

Answer 19

Localised or even personal in their cause and effect.

Question 20

What is a fortuitous event

Answer 20

it must be accidental or unexpected and not inevitable, for the insured.

Question 21

What is insurable interest

Answer 21

the legally recognised financial relationship between the insured and the object or liability that is being insured

Question 22

Homogenous Risk

Answer 22

The risks are similar to those seen before.

Question 23

Objective risks

Answer 23

A sufficient 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

losses of the few who suffer misfortune are met by the contributions of the many

The insurer endeavours to make sure that the premium paid by the insured is proportionate to the risk which they introduce to the pool.

Question 25

Business equation for insurer

Answer 25

premium ≥ claims + operating costs

Question 26

Law of large numbers

Answer 26

enables the insurer to predict fairly confidently the final cost of claims in any one year.

Question 27

Equitable premiums

Answer 27

insurers take into account the different elements of risk brought into the pool by each of the insureds

Question 28

Peril

Answer 28

can be defined as that which gives rise to a loss, i.e. fire or flood.

Question 29

Hazard (2)

Answer 29

can be defined as that which influences the operation or effect of the peril. 1) Physical - physical characteristics of the risk 2) Moral - arises from the attitude and behaviour of people

Question 30

Reasons for buying insurance (3)

Answer 30

1)their attitude to their potential risk; 2)what price they are prepared to pay for the peace of mind which insurance gives; 3)the extent to which they feel they have a choice about insuring the risk.

Question 31

Primary functions of insurance (2)

Answer 31

1) Spreading & transferring risk 2) providing insured with degree of certainty

Question 32

Secondary functions of insurance

Answer 32

1) Companies do not have to set aside large sums of money as 'safety nets' for dealing with losses. 2)It allows businesses to expand. – Jobs are protected. 3) Insurers have the opportunity to invest their funds, benefiting the economy.

Question 33

Invisible exports

Answer 33

Insuring risks overseas, for overseas clients, so the insurance is exported to those other countries.

Question 34

Compulsory insurance (3)

Answer 34

1) Motor- Act 1988 2) Public liability - ownership of dangerous dogs (1991)+ riding establishments (1970) 3) Employers Liability - Act 1969 - min limit 5 mill - market provides 10 mill

Question 35

What is the most important service an insurer provides

Answer 35

Good claims handling