Chapter 1 Flashcards
What are the 4 components of risk?
Uncertainty
Level of risk
Peril and Hazard
How is risk usually assessed?
Frequency and Severity
What is an example of a physical risk control?
Alarm systems to prevent potential robberies
What is an example of a financial risk control?
Ensuring contracts are well-worded so that certain risks may not fall upon the company.
What is the difference between financial and non-financial risks?
Some risks we may face are not capable of financial measurement, they may have a financial aspect to them, but it is incidental. Take a family heirloom for example, this could be insured at market value, but insurers cannot quantify sentimental value placed on it by the family. Therefore, for a risk to be insured against the outcome of adverse events it must be capable of measurement in financial terms.
What is the difference between pure and speculative risks?
Although there are aspects of business that can be insured, this does not include aspects such as misreading the market or a business failing due to operating in a competitive market. These are known as speculative risks and cannot be insured. Pure risks, on the other hand, are those where there is possibility of loss but not of gain. The best outcome is a break-even scenario. It is these types of risk that are generally insurable
What is the difference between particular and fundamental risks?
Risks that occur on a vast scale are uninsurable and are known as fundamental risks. They arise from social, economic, political or natural causes and are widespread in their effect. The two previous uninsurable risks mentioned (non-financial, and speculative) are uninsurable as a matter of principle. However, fundamental risks are often left uninsured due to lack of capacity and appetite in the market on the part of the insurers, an example would be assurance against the damages caused by war. In contrast, particular risks are localised in their effect and will impact few businesses and tend to be more insurable.
What are the features of insurable risks? (Ex. Financial, Pure, and Particular)
A fortuitous event
Insurable Interest
The risk must not be against public policy
The risk must generally be a one off
Sufficient number of homogenous exposures
What is the law of large numbers?
The law of large numbers theorises that the average of many results closely mirrors the expected value, and the difference narrows as more results are introduced. This can be used by the insurer to give an accurate prediction of the number of claims in any one year. With this knowledge the insurer can estimate losses and confidently charge a fixed premium.
Why do insurers pool risks?
The basic concept of insurance is that the losses of the few who suffer misfortune are met by the contributions of the many, who are exposed to similar potential loss. Insures look to set themselves up to operate in a pool. Contributions, in the form of premiums from the many insureds, go into this pool. From the pool, payments are made to cover the losses of the few.
What is a peril?
That which gives rise to a loss
What is a hazard?
That which influences the operation or effect of a peril?
What are the primary functions of insurance?
Spreading the risk
Providing a degree of certainty
Transferring Risk
What are the secondary functions of insurance?
Companies do not have to set aside large sums of money
Companies can be confident to expand their business
Jobs are protected
Losses are reduced in size and number
Insurers are largely investors of funds
‘Invisible’ Exports
