Chapter 1 Flashcards
Risk Transfer
The accepting of an unknown future potential risk by an insurer for an agreed premium
Risk Seeking
Willing to carry out risky activities
Risk Averse
Looking to minimise risk
Risk Management
Developing a formal strategy of managing various risks which can impact a business. Association of Insurance and Risk Managers in Industry and Commerce (AIRMIC) have published a widely adopted Risk Management Standard.
FPA
Fire Protection Association
Thatcham Research Centre
Motor insurers rely on them for testing vehicle safety
MIAFTR
Motor Insurance Anti-Fraud and Theft Register. The register records all details of vehicles and motorcycles that become total losses arising from any cause, including third party and theft.
Components of Risk
Uncertainty
Level of Risk
Peril and Hazard
Level of Risk
High Frequency and Low Severity
Low Severity and High Frequency
Peril
That which causes a loss
Hazard
That which impacts the likelihood of a peril
Physical Hazard
Physical characteristics of a risk e.g. Standard of building construction
Moral Hazard
In insurance, usually the conduct of the insured. e.g. their attitudes and behaviours.
Categories of Risk
Financial & Non-Financial
Pure and Speculative Risks
Particular and Fundamental Risks
Financial & Non-Financial Risks
A risk must have the potential for financial loss to be insurable
Pure Risks
Possibility of loss and no gain
Speculative Risks
May involve three possible outcomes: Loss, break-even or gain
Particular Risk
Effect of a loss is localised to one individual or business. E.g. a fire within a factory
Features of an insurable risk
Fortuitous Event
Insurable Interest
Not against public policy e.g. insuring against the cost of a fine
Fundamental Risk
Cause of loss is outside the control of any one individual or a group and effects are widespread. E.g. Financial Recession
Homogeneous Exposures
A sufficient number of exposures to similar risks. E.g. Earthquakes in Japan
Law of Large Number
Theory which determines that predictions become more accurate as the base of data used increases in size. Enables the insurer to predict the final cost of claims in any one year.
Pooling of Risk
An insurance company gathers together relatively small sums of money from people who want to be protected from a similar type of peril. A common pool is set up and the insured pays out claims to compensate the losses of the few.
Equitable Premiums
The insured are expected to make a fair contribution to pooling system. E.g. someone with a larger house will be expected to pay more for buildings insurance, a it would cost more to rebuild than a smaller property.
EU Gender Directive
Insurers can no longer use gender as a criteria for rating a customer. This impacts Life, Motor, Income protections.
Co-Insurance
Sharing the risk with others. This can be another insurer or the insured.
Self Insurance
Individual or company have decided not to use insurance and carry the risk themselves