Chapter 1 AI Flashcards
What is the definition of risk?
The possibility of an unfortunate occurrence, doubt concerning the outcome of a situation, unpredictability, the possibility of loss, the chance of gain
What are the main components of risk?
- Uncertainty
- Level of risk
- Peril and hazard
What is risk management?
The process of measuring and dealing with risks faced by individuals or organizations
What is the relationship between frequency and severity in risk assessment?
Frequency refers to how often an event might happen, while severity refers to how costly it would be if it did happen
What does co-insurance mean?
A situation where multiple insurers share the risk of a policy
What is self-insurance?
A risk management strategy where an individual or organization sets aside funds to cover potential losses instead of purchasing insurance
What are the features of insurable risks?
Risks must be definite, measurable, and not catastrophic or subject to large losses
Fill in the blank: The process of identifying, analyzing, and controlling risks is known as _______.
risk management
True or False: All types of risks are insurable.
False
What is the purpose of pooling risk in insurance?
To spread the risk among a larger group to minimize the impact on any single member
What are the two categories of risks mentioned?
- Pure risks
- Speculative risks
What does the term ‘peril’ refer to in insurance?
The specific cause of loss or damage, such as fire or theft
What is an example of a fundamental risk?
Natural disasters or economic downturns
How does an underwriter define ‘a risk’?
Both the thing insured and the range of contingencies or scope of cover required
What role do insurers play in risk control?
They provide assessments and recommendations to improve risk management practices
What is the significance of the Law of Large Numbers in insurance?
It allows insurers to predict losses more accurately by analyzing the data from a large number of similar risks
Describe the three key steps in the risk management process.
- Risk identification
- Risk analysis
- Risk control
What is the focus of good risk management?
The identification and treatment of defined risks as a continuous process
What are the three types of internal controls in risk management?
- Detective controls
- Corrective controls
- Preventative controls
What is the purpose of the Motor Insurance Anti-Fraud and Theft Register (MIAFTR)?
To record and detect fraudulent activity in motor insurance
What is the aim of risk culture in an organization?
To improve risk awareness and management through education
Fill in the blank: The types of risks that are generally not insurable are referred to as _______.
uninsurable risks
What are the two dimensions of risk assessment in insurance?
Frequency and severity
Frequency refers to how often losses occur, while severity refers to the cost associated with those losses.
What is an example of high frequency and low severity in insurance?
Motor insurance claims, such as dented bumpers and cracked windscreens
These claims tend to be numerous but involve relatively low costs.
What does low frequency and high severity describe in insurance?
Events like aircraft accidents and oil spillages
These events occur infrequently but result in significant financial losses.
How do frequency and severity relate to each other in risk assessment?
They have an inverse relationship; as one increases, the other decreases
Insurers base risk acceptance on these factors.
Define ‘peril’ in the context of insurance.
That which gives rise to a loss
Examples include events like explosions and collisions.
Define ‘hazard’ in the context of insurance.
That which influences the operation or effect of the peril
Hazards can increase the likelihood of a peril occurring.
What is a physical hazard?
Physical characteristics of the risk, measurable dimensions
Examples include the construction of a building and security measures.
What is a moral hazard?
Arises from the attitude and behavior of people, typically the insured
Examples include carelessness and dishonesty.
What constitutes a financial risk?
Risks with measurable financial outcomes
Examples include theft, accidental damage, and legal liabilities.
What are non-financial risks?
Risks that cannot be measured in financial terms
Examples include personal decisions like choosing a marriage partner.
Define pure risks.
Risks where there is a possibility of loss but not of gain
Examples include the risk of fire and injury to employees.
What are speculative risks?
Risks that involve loss, break-even, or gain
Examples include gambling and investing in the stock market.
What are particular risks?
Localized or personal in their cause and effect
Examples include a factory fire or car collision.
What are fundamental risks?
Risks arising from causes outside individual control, usually widespread
Examples include economic recession and natural disasters.
What is a fortuitous event in insurance?
An accidental or unexpected occurrence
Non-fortuitous losses occur from deliberate actions.
What is insurable interest?
The legally recognized financial relationship between the insured and the object being insured
Necessary for a valid insurance contract.
What must insurance contracts not be against?
Public policy
Insurance should not cover risks that are morally or legally unacceptable.
What are homogeneous exposures in insurance?
Similar risks that allow insurers to predict frequency and extent of losses
Essential for applying the law of large numbers.
What is the basic principle of insurance?
The losses of the few are met by the contributions of the many
Insurers create a common pool from premiums to cover claims.
What does the law of large numbers allow insurers to do?
Predict the final cost of claims with confidence
It improves accuracy in estimating losses across a large number of similar risks.
What are equitable premiums?
Fair contributions to the insurance pool based on individual risk
Determined by underwriters considering various risk factors.
What was the EU Gender Directive?
A ruling that insurers cannot use gender as a premium calculation tool
This change was implemented in 2011.
What is co-insurance?
A strategy to manage risk by sharing it among multiple insurers
Helps to reduce the burden of large claims on a single insurer.
What did the CJEU rule regarding gender in insurance?
Insurers could no longer use gender as a premium calculation tool or in determining benefits.
This ruling led to the EU Gender Directive.
What is co-insurance?
A risk-sharing mechanism used in insurance, applicable between insurers and with the insured.
Co-insurance can refer to sharing risk among multiple insurers or the insured retaining part of the risk.
What happens when a risk exceeds an insurer’s retention limits?
The insurer can either decline the risk or share it with others through co-insurance.
In co-insurance, what is the role of the ‘lead office’?
The lead office is the first named insurer, carries the largest share of risk, and issues documentation.
They also manage changes and settlements on behalf of co-insurers.
What is the difference between an excess and a deductible in insurance?
An excess is a small fixed sum retained by the insured, while a deductible is a larger fixed sum.
What does ‘co-insurance 25%’ mean?
The insured pays 25% of each claim under the policy.
What is self-insurance?
A decision by an individual or company to retain risk instead of using insurance.
What are the reasons for buying insurance?
Attitude to risk, legal requirements, price for peace of mind, and choice of insuring the risk.
Insurance provides financial protection against potential losses.
How does insurance provide peace of mind?
By acting as a risk transfer mechanism, offering financial security against potential losses.
What are the economic benefits of insurance?
- Improved cash flow
- Encouragement of business expansion
- Improved loss control
- Investment of premiums
- Social benefits like job protection
What is the law of large numbers in insurance?
The principle that the actual number of losses tends to be close to what was expected when covering a large number of risks.
What is pooling of risk?
The principle that the losses of the few are paid for by the premiums of the many.
What are the characteristics of insurable risks?
- Financial
- Pure
- Particular
Uninsurable risks are non-financial, speculative, and fundamental.
What is dual insurance?
The existence of two or more policies covering the same risk.
What are the three steps to managing risks?
Risk identification, risk analysis, and risk control.
What type of risk is local competition for a business?
Speculative risk.
What is the purpose of an intruder alarm in a workshop?
It serves as a physical control measure.
What must the pool of insurance premiums be large enough to cover?
Losses in any one year plus the costs of operating the pool and an element of profit.
