Chapter 1: Fundamental Principles Flashcards
Risk Transfer Mechanism
Acceptance of an unknown potential future risk
Meanings of risk
- Peril being insured (e.g. Fire/Collision)
- Subject matter of insurance (e.g. Factory/Ship)
- The thing being insured (e.g. property itself)
Risk seeking
Willing to carry certain risks
Risk Averse
Someone who is happier to minimise the risks they are exposed to
Risk Management
- Measurement and dealing with risks we face
- Identification, analysis and economic control of risks which threaten assets
AIRMIC
Association of Insurance Risk Managers in Industry and Commerce
3 Reasons risk management is important
- Reduces potential losses
- Gives confidence to shareholders
- Provides disciplined approach to quantifying risks
Risk Identification
Company discovering its possible exisiting, and potential future, issues
Who handles Risk Analysis
Risk managers examine past data to evaluate risks
Risk Control
Course of action taken to avoid potential adverse consequences and reduce/eliminate the risk
Physical risk controls
Sprinklers and Alarms are examples
Financial risk controls
e.g. making sure contracts are strongly worded in regards to responsiblity
Uncertainty
Doubt about the future which means any prediction of the future is incomplete
Assessing the level of risk
- Frequency
- Severity
Low frequency but high severity risk
Aircraft accidents (not often but very costly)
Why do insurers care about frequency and severity
Important to avoid drastic changes in peaks and troughs
High Frequency but Low Severity risk
Private motor insurance (many losses for damages but never a significant claim)
Insurable risk
A risk where the outcomes in an adverse event are financially measureable
Insurance is compensatory value placed on loss is not determined before
Benefit policies
e.g. Personal Accident / Sickness policies
- no way of valuing precisely the loss of life/sight/limb so these policies are taken out to provide a pre-agreed amount
Speculative risk
- Cannot be insured
- e.g. Misreading the market or failing because of local competition
Pure risk
A risk where there is possibility of loss but not gain, breakeven is the best case
Fundamental Risk
Type of risk that occurs on such a vast scale they are uninsurable
Often risks that arise from natural widespread events (famine/recession)
Particular risk
A risk that is localised or personal in cause and effect
could have a widespread cause (e.g. storm) but the effect is localised
Factors that make a risk insurable
- Fortuitous
- Has an insurable interest
- Must not go against public policy
- Must not be a one off
