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LM1 > Chapter 1: Fundamental Principles > Flashcards

Chapter 1: Fundamental Principles Flashcards

1
Q

Risk Transfer Mechanism

A

Acceptance of an unknown potential future risk

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2
Q

Meanings of risk

A
  1. Peril being insured (e.g. Fire/Collision)
  2. Subject matter of insurance (e.g. Factory/Ship)
  3. The thing being insured (e.g. property itself)
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3
Q

Risk seeking

A

Willing to carry certain risks

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4
Q

Risk Averse

A

Someone who is happier to minimise the risks they are exposed to

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5
Q

Risk Management

A
  • Measurement and dealing with risks we face
  • Identification, analysis and economic control of risks which threaten assets
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6
Q

AIRMIC

A

Association of Insurance Risk Managers in Industry and Commerce

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7
Q

3 Reasons risk management is important

A
  1. Reduces potential losses
  2. Gives confidence to shareholders
  3. Provides disciplined approach to quantifying risks
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8
Q

Risk Identification

A

Company discovering its possible exisiting, and potential future, issues

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9
Q

Who handles Risk Analysis

A

Risk managers examine past data to evaluate risks

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10
Q

Risk Control

A

Course of action taken to avoid potential adverse consequences and reduce/eliminate the risk

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11
Q

Physical risk controls

A

Sprinklers and Alarms are examples

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12
Q

Financial risk controls

A

e.g. making sure contracts are strongly worded in regards to responsiblity

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13
Q

Uncertainty

A

Doubt about the future which means any prediction of the future is incomplete

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14
Q

Assessing the level of risk

A
  1. Frequency
  2. Severity
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15
Q

Low frequency but high severity risk

A

Aircraft accidents (not often but very costly)

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15
Q

Why do insurers care about frequency and severity

A

Important to avoid drastic changes in peaks and troughs

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16
Q

High Frequency but Low Severity risk

A

Private motor insurance (many losses for damages but never a significant claim)

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17
Q

Insurable risk

A

A risk where the outcomes in an adverse event are financially measureable

Insurance is compensatory value placed on loss is not determined before

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18
Q

Benefit policies

A

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
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19
Q

Speculative risk

A
  • Cannot be insured
  • e.g. Misreading the market or failing because of local competition
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20
Q

Pure risk

A

A risk where there is possibility of loss but not gain, breakeven is the best case

21
Q

Fundamental Risk

A

Type of risk that occurs on such a vast scale they are uninsurable

Often risks that arise from natural widespread events (famine/recession)

22
Q

Particular risk

A

A risk that is localised or personal in cause and effect

could have a widespread cause (e.g. storm) but the effect is localised

23
Q

Factors that make a risk insurable

A
  • Fortuitous
  • Has an insurable interest
  • Must not go against public policy
  • Must not be a one off
24
Q

Fortuitous event

A

An event which is unexpected/accidental not inevitable

25
Q

Insurable interest

A

Legally recognised financial relationship between the risk and the insured

26
Q

Public policy

A

Contracts must not go against what is considered the moral thing to do

26
Q

Homogenous exposures

A
  • Objective risks (number of exposures with historical patterns) which enable insurers a better ability to forecast future losses

Exposure pattern harder to determine with smaller amount of similar risk

27
Q

Pooling of risks

A
  • Pool of contributions of the many will compensate the few losses
  • Insurers will try to make sure the premium paid to add the new risk is proportionate to potential losses of adding the risk
28
Q

Law of large numbers

A

Large number of similar situations means the true number of events occuring trends towards the expected

Makes it easier to predict final claims cost

29
Q

Peril

A

Something that creates a loss (fire/flood)

30
Q

Hazard

A

Something that influences/effects a peril

31
Q

Physical hazard

A

Physicaly characteristics of a risk (e.g. measuring dimensions, construction of property including materials)

32
Q

Moral Hazard

A

Relates to the attitude and behaviour of people (including the conduct of the insured)

33
Q

Primary functions of insurance

A
  • Spreading risk
  • Providing some degree of certainty to an insured
  • Transferring risk
34
Q

Secondary functions of insurance

A
  • Money satefy net (dont need to stockpile money)
  • Confidence
  • Jobs are protected
  • Losses reduced in size and number
  • Invisible exports
  • Investment into the economy
35
Q

Compulsory insurance

A

Insurance made required by law

Gov can act as insurer in own right (welfare benefits) some are private

36
Q

Compulsory insurance for private individuals

A
  • Motor insurance
  • PL for ownership of dangerous animals
37
Q

Compulsary insurance for professions and businesses

A
  • Motor and EL are for every business that use vehicles on the road
38
Q

Compulsory insurance for specific trades and professions

A

Motor/EL potentially
- Public liability

39
Q

Compulsory insurance for financial services and solicitors

A

Professional indemnity

40
Q

Compulsory insurance for nuclear reactors

A

Marine pollution liability

41
Q

Reasons for compulsory insurance

A
  • Provide funds for compensation
  • Response to national concerns
  • Reputation of the profession
42
Q

Employers Liability

A
  • Made compulsory under Employers liability Act 1969
  • Insures against liability to pay compensation to employees who sustained injury during employment
43
Q

Motor Insurance

A
  • Became illegal to drive without 3rd party cover under the Road Traffic Act 1988
44
Q

Public liability insurance for Riding Establishments

A
  • Became compulsory for riding establishments aafter the Riding Establishments act 1970
45
Q

Liability insurance (Dangerous wild animals/dogs)

A
  • Compulsory for private ownership
46
Q

Professional Indemnity

A
  • Compulsory for professionals authorised by the FCA
  • Solicitors must also hold

Indemnifies claims for financial loss clients suffered from negligence

47
Q

Compulsory insurance for brokers

A
  • if authorised by FCA, intermediaries must have PI
48
Q

Role of Claims Personnel

A
  • Identify invalid claims and advise quickly
  • Assess and calculate funds required to pay claim for both indemnity and any additional reserves
  • Instruct experts
  • Settle claims cost-effectively
  • Liaise with colleagues in other areas of operations to provide claims data (individual + trend)

LM1 (9 decks)

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