Chapter 1 Flashcards
Risk Management
The means of attempting to deal with the risks we face
Definitions of risk (4)
- Possibility of something unfortunate happening. 2. doubt concerning somethings outcome. 3. unpredictability. 4. possibility of loss.
Risk Transfer Mechanism
The acceptance of an unknown future potential risk by an insurer for an agreed premium.
Risk-Seeking
More inclined to take on risk
Risk-Adverse
Less inclined to take on risk
3 reasons why risk management is important
- Reduces potential for loss. 2. Gives shareholders confidence. 3. Able to quantify risk for future benefit
Risk appetite
How risk-seeking or risk-adverse someone is
Level or risk is determined by…
…Frequency & Severity
Elements of Risk Control (3)
control, reduce and/or eliminate risk
Aspects to controlling risk (2 & e.g. for each)
Physical (sprinkler/alarm) - Financial (contracts are well worder)
the concept of uncertainty
Implies doubt about the future, as a result of incomplete knowledge
Frequency
How oftne it will happen
Severity
How serious it will be if it happens
Peril
That which gives rise to a loss
Hazard
That which influences the effect of the peril
Physical Hazard
Physical characteristics of the risk that includes measurable dimensions of the risk
Moral Hazard
The attitudes and behaviour of people involved
Examples of Moral Hazards (3)
Carelessness (A truck driver’s lack of care), Dishonesty, Social Attitudes (e.g. person who regards insurance fraud as acceptable
Insurable categories of risk (3)
Financial, Pure, Particular
Uninsurable categories of risk (3)
Non-Financial, Speculative, Fundamental
Financial risk
Financially measurable
Non-Financial risk (e.g.)
Sentimental value of something
Speculative Risk
A possibility of gain but not of loss
Pure Risk
Possibility of loss but not to gain
Fundamental risk (e.e.g)
Famine, Nuclear blast
Particular risk (+e.g.)
Localised in effect - car collision or factory fire
A Fortuitous Event
Accidental, or unexpected and not inevitable
Insurable Interest
Legally recognised financial relationship between the insured and the object or liability being insured
Homogenous Exposures
the risks are similar to those seen before
Primary functions of risk (3)
- Spreading the risk 2. Providing degree of certainty/peace of mind 3. Transferring risk
Employers’ Liability Act 1969
Compulsory for employers in GB to effect employers’ liability insurance
Road Traffic Act 1988
Compulsory to have motor insurance (third party is granted automatically)
