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London Markets 1 > CHAPTER 1: Fundamental Principals of Insurance > Flashcards

CHAPTER 1: Fundamental Principals of Insurance Flashcards

1
Q

How can insurance be defined?

A

As a risk transfer mechanism

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2
Q

What is risk management?

A

The means of dealing with risks and measuring these risks.

This is expected of the insured to mitigate risks

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3
Q

What are the definitions of ‘risk’?

A
  • A potential problem that can be insured
  • The subject matter of insurance
  • The entity being insured and the scope of cover required
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4
Q

What are the attitudes to risk?

A
  • Risk-seeking - Happy to carry risks themselves

- Risk Averse - Try to minimise risks

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5
Q

Who are the AIRMIC?

A

The Association of

The Association of Insurance Risk-managers in Industry and Commerce

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6
Q

What is a Risk manager?

A

Someone appointed to develop strategies and control risks for a business. A member of the AIRMIC.

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7
Q

Why is Risk Management important?

A
  • It reduces the potential for loss
  • It gives Shareholders confidence the Business is being run correctly
  • It provides a way of quantifying risk
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8
Q

High net-worth individuals in insurance?

A

These are more likely to adopt a more formalised approach to their risks and have certain insurance products from them.

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9
Q

What are the processes in Risk Management?

A
  • Risk Identification: A company discovers any possible existing and potential future threats. Not all are insurable but all must be managed. Risks are either avoided, minimised, managed or transferred (insured).
  • Risk Analysis: Examine past data to evaluate and analyse the risk. Usually consider the same elements when rating risks. Can use scales for likelihood of risk happening and the impact, these can be multiplied to rank the risks.
  • Risk Control: For any risks, they are either controlled, reduced or eliminated. Elimination is usually the most expensive or impractical. The choice of control is subject to the test of whether it is reasonable compared to the actual risk happening.
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10
Q

What are the distinct aspects of controlling a risk?

A
  • Physical Controls (i.e. Sprinklers)

- Financial Controls (i.e. well worded contracts)

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11
Q

Give two examples of organisations providing information about modern changes in insuring areas?

A
  • Building Research Establishment (BRE)

- Fire Protection Association (FPA)

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12
Q

What are the components of Risk?

A
  • Uncertainty
  • Level of risk
    > Frequency - How often it happens
    > Severity - How serious the consequences
  • Peril and Hazard
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13
Q

In regards to a risk, what is Uncertainty?

A
  • Uncertainty - There is doubt about the future, i.e. not knowing when or if an event will occur.
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14
Q

In regards to a risk, what is the Level of Risk? What are the common combinations?

A

The relationship between frequency and severity varies from risk to risk
> Frequency - How often it happens
> Severity - How serious the consequences

Can have High frequency + low severity (Ref. Frank E. Bird’s Triangle), Low frequency + high severity

Multiplying a rating for each of these factors makes it quantifiable.

Having a predictable type of risks (no troughs or peaks in claims), then the insurer can prepare for these risks and calculate exposure.

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15
Q

In regards to a risk, what is a Peril and a Hazard?

A

A peril is something that gives rise to a loss (i.e. a flood, fire, explosions, lightning, collision, dishonesty), the thing being insured

A Hazard is something that influences the operation or effect of the peril. (i.e. a lack of sprinklers would be a hazard), can be physical, moral or both.

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16
Q

What are the categories of Risk?

A

Groupings:

  • Financial and non-Financial
  • Pure and Speculative
  • Particular and Fundamental
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17
Q

Explain and state what is insurable in regards of financial and non-financial Risks?

A

Financial risks are any risks where a monetary value can be applied. Non-financial risks may have personal or emotional value, such as heirlooms, and cannot be priced.
Financial - Insurable Non-Financial - not Insurable

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18
Q

Explain and state what is insurable in regards of Pure and Speculative Risks?

A

A speculative risk is a risk withe the goal of making a gain, but the possibility to break-even or fail. These cannot be insured. (Example is gambling/lottery)

A pure risk is where the best outcome is to break-even, and there’s possibility of a worse situation. These can be insured. (example is travelling in a plane)

19
Q

Explain and state what is insurable in regards of Fundamental and Particular Risks?

A

Fundamental risks are risks that occur on such a large scale that they are generally uninsurable, such as war, nuclear risks or recession. However there are exceptions.

Particular risks are localised or personal in their cause and effect, although the cause can be more widespread. The effect is localised or personal, e.g. not all property in a region is damaged. These are insurable.

20
Q

What is meant by a fortuitous event?

A

An event that is accidental or unexpected and not inevitable (from the insureds perspective).

A risk must be a fortuitous event.

21
Q

What is insurable interest?

A

A financial relationship between the insured and liability or object being insured.

A risk must have insurable interest.

22
Q

What is public policy?

A

Public policy are laws and things that society consider the right or moral thing to do.

Can’t insure risks that go against public policy.

23
Q

What is an objective risk, and what are homogeneous exposures?

A

An objective risk is where there is sufficient historical data to have an expectation of future losses for that risk.

Homogeneous exposures are risks that are similar, not necessarily the same. Having a large number of prior homogeneous exposures is ideal but not necessary.

24
Q 
State whether the following are insurable or uninsurable risks:
Financial - Non-financial
Pure - Speculative
Particular - Fundamental (generally)
Fortuitous event - Deliberate act
Insurable interest
Public interest
Homogeneous exposures - One-offs (generally)
A

Left side are insurable, right are typically not.

25
Q

What is the equation for a pools premium?

A

Premium ≥ Claims + operating costs.

Premium paid by insured is proportionate to the risk they introduce to the pool. This premium should be larger so the insurer makes a profit.

26
Q

What is the law of large numbers?

A

Where there are a large number of similar situations, the actual number of events occurring tends to the expected number. This is used to calculate a fair premium together with historic knowledge.

27
Q

How does an insurer successfully operate a pooling system?

A

Have multiple pools for each group of risks.

28
Q

What is an equitable premium?

A

An equitable premium is a premium that is fair based on the risk the insured is introducing.

29
Q

What are discrimination factors?

A

The elements of risk that an insured brings into the pool.

30
Q

What are the two types of hazard, explain them?

A

Physical hazard: Anything physical and has measurable dimension i.e. Security protection, age of insured, standard of construction.

Moral hazard: Anything from the attitude of behaviour of people, typically conduct. i.e. carelessness, dishonesty and social attitudes (thinking fraud is ok).

31
Q

Examples of hazards that affect some perils

A

Explosions: Storage of chemicals, not ensuring smoking is banned in certain areas.

Lightning: The construction of any buildings or lack of quality in lightning conductors used.

Collision: The speed, behaviour, extent of training.

Dishonesty: Poor security in place or inadequate operational controls.

32
Q

What are the primary functions of insurance?

A
  • Spreading the risk
  • To provide a degree of certainty - a fixed premium instead of a potentially large claim
  • Transfer the risk
33
Q

What are the secondary functions of insurance?

A
  • Companies need not set aside large sums of money
  • Companies can confidently expand
  • Jobs are protected
  • Losses are reduced in size and number
  • Insurers are largely investors of funds - reserves
  • Invisible exports - most business written in the London Market is not from UK
34
Q

What insurance is compulsory for private individuals?

A

Motor insurance, public liability insurance for dangerous wild animals/dogs.

35
Q

What insurance is compulsory for professions and businesses?

A

Motor insurance (if vehicles used on a road) and employers liability insurance if has employees.

Other insurance is mandatory depending on the business type and professions, I.E. PII

36
Q

What are the reasons for compulsory insurance?

A
  • To provide funds for compensation
  • In response to national concerns
  • Reputation of the professions
37
Q

What is employers’ Liability Insurance, minimum LOI and what law made it compulsory?

A

The Employers’ liability (compulsory insurance) Act 1969.

Insures employers against their liability to pay compensation to employees who sustain bodily injury or disease, arising from employment.

Minimum LOI is £5m.

38
Q

What is ELTO?

A

The Employers’ Liability Tracing Office. They have a database of all new and renewed policies from 01/04/11 and allow tracing of employers. They do not handle compensation and provide no guarantee of a response from the insurer.

39
Q

What law made motor insurance compulsory and what does it need to cover?

A

The Road Traffic Act 1988.

Must cover third party property damage and third party bodily injury or death.

40
Q

What is the law governing Public Liability insurance for Riding Establishments and what must it cover?

A

The Riding Establishments Act 1970 - all riding establishments must have public liability insurance.

Must indemnify the insured against claims arising from the use of the insureds horses. (harm to riders, members of the public, claims against rider for use of the horse etc…)

41
Q

What insurance must a solicitor hold and by which law?

A

The solicitors Act 1974.

Solicitors must hold Professional Indemnity Insurance. Insure the solicitor against claims for negligence.

42
Q

What is the most important aspect in regards to insurance as a service industry?

A

The Claims Handling Process.

43
Q

What is the job of a claims Personnel?

A

To:

  • Deal with claims fairly
  • Identify invalid claims
  • Assess and calculate the reserves for a claim
  • Instruct any necessary experts
  • settle claims cost-effectively
  • liaise with colleagues to provide claims data
44
Q

As an overview, what traits does a risk require to be insurable?

A

It must be:

  • Financial
  • Pure
  • Particular
  • Fortuity
  • Insurable Interest
  • Must not be against Public Policy

London Markets 1 (9 decks)

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