chapter 1 Flashcards
what is risk management?
risk measurement + attempting to deal with the risks we face
definition of risk…
possibility of something unfortunate happening
possibility of a loss
unpredictability
chance there might be a gain
insurance is…
a risk transfer mechanism
acceptance of an unknown future risk by an insurer for an agreed premium
3 other ways “risk” is used in the market place
- peril being insured
- subject matter of insurance eg. the factory/ship
- the thing insured eg. the property
2 attitudes to risk
risk adverse & risk seeking
why is risk management important?
- reduces the potential for loss
- gives confidence to shareholders
- provides disciplined approach to quantifying risks
what is the function of risk management?
- identification (carry out physical examination or survey)
- analysis (examine past data to predict likely future losses)
- control (reduce or eliminate)
2 aspects to controlling risks:
physical: eg installing sprinkler systems or alarms
financial: well worded contracts
organisations involved in loss prevention
building research establishment (BRE) & Fire Protection Association (FPA)
- provide construction guidelines
- research new construction methods
- provide new reports
components of risk
- uncertainty
- levels of risk
- peril and hazard
perils and hazards
Perils - gives rise to a loss eg fire or flood
hazard - influences the effect on the peril eg. no having sprinkler systems or fire alarms
physical and moral hazards
physical = physical characteristics eg. measurable dimensions of risks
moral hazard - attitude and behaviour of people
categories of risk
financial - non financial
pure - speculative
particular - fundamental
financial & non financial
financial - must have a cost
non financial - might place value on heirloom which has an intrinsic value but not high market value
pure & speculative
pure - possibility of a loss but not of a gain, best you can achieve is a break even
speculative - cant aim to make a gain eg. cant insure against a business failing because of local competition.
particular & fundamental
particular - localized (individual/region)
fundamental - affects to large of a group that it is uninsurable. widespread in effect eg. famine in a whole country
features of insurable risks:
fortuitous event - accidental or unexpected
insurable interest - must have a financial relationship between you and the object being insured
public policy - cant be insured against getting a fine or breaking the law
homogeneous exposure - historical patterns forecast the expected extent of future losses
pooling of risks:
losses of the few are met by the contributions of the many
different pools for different classes of business
premium must be proportionate to the risks which they are introducing to the pool
law of large numbers
large number of similar situations, the actual number of events occurring tends towards the expected number
10000 coin flip > 10 coin flip
equitable premiums
for a pooling system to be successful - a number of pools must be set up
one for each main group of risks being underwritten
everyone being insured must be willing to make a fair contribution to the pool
cost covering & profit making
reasons why people buy insurance
- attitude to their potential risks
- gives peace of mind
- the extent to which they feel they have a choice about insuring the risk
primary functions of insurance
- spreading the risk
- providing a degree of certainty
- transferring the risks
secondary functions of insurance
- companies do not have to set aside safety nets
- companies can expand their businesses
- jobs are protected
- losses are reduced in number and size
- benefit the economy
- invisible exports
compulsory insurance for private individuals
motor insurance
public liability insurance
ownership of dangerous or wild animals
compulsory insurance for professions and businesses
motor insurance
employers liability insurance
employers liability insurance
Employers’ Liability (Compulsory Insurance) Act 1969
insures employers against their liability to pay compensation to employees who sustain bodily injury or disease, arising out of and in the course of their employment.
minimum required limit of 5 million but 10 million is standard
Employers’ Liability Tracing Office (ELTO) database - contains all claims after 2011 - mechanism for tracing potential insurance cover
motor insurance
Road Traffic Act 1988
it is illegal to cause or permit the
use of a vehicle on a public road
unless an insurance policy is in force, covering third party property damage and third party bodily injury or death.
public liability insurance
riding establishments
covers arising claims from using the insured horses - person riding the horse, members of public
also covers claims against the person riding the horse against injury to members of the public
liability insurance
Dangerous Wild Animals Act 1976 or the Dangerous Dogs Act 1991
the local authority must be satisfied with the adequacy of insurance
can be extension to another insurance policy held by the insured/owner. eg. household policy
professional indemnity insurance
Solicitors Act 1974 - insurance must
indemnify the solicitor against claims for financial loss suffered by clients as a result of the
solicitor’s professional negligence.
Insurance intermediaries - authorised by FCA
claims handling process
insurer ‘experience’ is generally centred on claims handling
principles set by the FCA reflect the professional and ethical standards that should guide those who work in insurance
CII code of ethics
members are required to:
‘treat people fairly regardless of: age, disability, gender reassignment, marriage and civil partnership, pregnancy and maternity, race, religion and belief, sex and sexual orientation’.
role of claims personnel
- deal with claims efficiently and fairly
- identify claims which are not valid
- calculate funds to be set aside for claims
- instruct necessary experts
- settle claims cost effectively
- liaise with colleagues to provide them with data
