Chapter 1 Flashcards
What are 2 ways to measure risk?
•Predictably - is it gonna happen or not
•Uncertainty - the size of that risk
What are the 2 elements of risk?
- Peril: what we are insuring against
- Hazard: influences the operation or effect the peril
What are the 2 different types of hazards?
- Moral hazards: people’s attitudes, etc
- Physical hazards: physical facts of a matter
What are the 3 functions of risk management?
- Identification - risks are identified
- Analysis - assess + quantify the risk
- Control - physical controls (e.g. reduce risk of x by implementing x) + financial controls (insuring it)
What is the importance of risk management?
•Reduces the potential for loss
•Gives shareholders confidence that the business is being run properly
What is insurable interest?
•We can only insure for monetarily value, not sentimental value
•So, non-financial risk are hard to quantify financially
Pure risks vs speculative
•Pure risks are only insurable as they involve the chance of only a loss
•Can’t insure speculative risks (e.g. gambling) as things could stay the same, suffer a loss or a gain
What is the principle of indemnity?
Insurance policies put insureds back in the same financial position as they were prior to the loss
What is the principle of betterment?
An insured should not gain from insurers - e.g. shouldn’t get a more expensive car after a car crash
Fundamental vs particular risk
•Fundamental risk: faced by as a group + usually caused by natural, social, or political phenomena - e.g. tsunami, inflation, terrorism, etc
•Particular risk: due to specific, individual events, felt by a few a single or few individuals, + personal in nature - e.g. car theft, localised storm, etc
Examples of risks which are insurable?
•Financial risks
•Pure risks
•Particular risks
•Insurable interest
•Not against public policy
Examples of risks which are non-insurable?
•Non-financial risks
•Speculative risks
•Fundamental risks
•No insurable interest
•Against public policy
What is the frequency-severity method of a risk happening?
•High frequency + low severity = happens often but not a big payout
•Low frequency + high severity = doesn’t happen very often but big payout
What are the main features of insurance?
•Insurance is a risk transfer mechanism - insurers take the financial risk + transfer it for a known premium
•The policyholder then transfers the risk to a common insurance pool paid by numerous policyholders
What are the benefits of buying insurance?
•Companies/individuals don’t need to set large amounts of money to fund losses
•Companies can be confident to expand their business w/ insurance protecting that investment
•Insurers are major employers
•Losses are reduced in size + number
•Insurers are large investors of funds
What are the primary functions of insurance?
•Spreading the risk
•Providing a degree of certainty
•Transferring the risk
What are the secondary functions of insurance?
•Jobs are protected
•Companies can be confident to expand their business
•Companies don’t need to set aside money as ‘safety nets’ for dealing w/ losses
•Insurers are investors of funds, which benefits the economy
•Invisible exports - insurance exported from London results in a flow of money into London, which assists the financial position of UK PLC
What is compulsory insurance and examples?
•It’s intended to protect innocent victims
•Governments require insurance for certain risks - e.g. motor insurance to protect victims/3rd parties
•Professional bodies + regulators require certain types of business/profession to insure - e.g. professional liability for lawyers + architects, etc
What is a peril?
Describes the factor that leads to a loss
What is a hazard?
Describes factors which affect the likelihood of a peril occuring
