Chapter 1 - Fundamental Principles of Insurance

Question 1

How could you define risk?

Answer 1

Risk is the possibility of something unfortunate happening, the doubt concerning the outcome of an event, the possibility of a loss or the chance of gain.

Question 2

In Insurance terms, how do we define risk?

Answer 2

The prile insured (for example theft or fire), the subject matter of the insurance (for example a factory, a ship or a potential liability), and the actual ‘thing’ insured.

Question 3

How does risk-seeking differ from risk-averse?

Answer 3

Risk-seeking would be the a willingness to carry risk themselves, whereas risk-averse would be happier to transfer the risk or avoid it (for example, taking out insurance as a means to transfer the risk)

Question 4

What is risk management?

Answer 4

Reviewing and developing a strategy to minimize or manage risks

Question 5

What are the key functions of risk management?

Answer 5

Risk Identification, Risk Analysis, and Risk Control

Question 6

What are the three components of risk?

Answer 6

Uncertainty, Level of Risk, and Peril and Hazard

Question 7

Define: Frequency

Answer 7

how often a potential risk can happen

Question 8

Define: Severity

Answer 8

how serious the outcome will be if the risk occurs

Question 9

Give an example of high frequency low severity.

Answer 9

Motor accidents, windshield damage

Question 10

Give an example of low frequency high severity.

Answer 10

Accidents involving aircrafts

Question 11

What is a financial risk?

Answer 11

A risk where financial loss can be calculated. For example, loss of profit following a fire. This can be calculated as the insurer can review historical data to make an estimate on the financial loss which may occur.

Question 12

What is a non-financial risk?

Answer 12

A risk where no financial loss can be calculated. For example, a family heirloom. Whilst the value of the item can be calculated and insured, the sentimental value or this item is not insurable.

Question 13

What is a pure risk?

Answer 13

A pure risk is where there is the possibility of a loss, but not of gain. For example a risk of injury at work where the employee maty receive damages and costs.

Question 14

What is a speculative risk?

Answer 14

Speculative risk is one in which there may be some kind of a gain. For example, the risk being winning the lottery. These risks are uninsurable

Question 15

What is a particular risk?

Answer 15

A risk that is localised or personal in cause and effect. For example, a car collision, home or vehicle theft.

Question 16

What is a fundamental risk?

Answer 16

A fundamental risk is one in which the loss would occur on such a vast scale that they are uninsurable. For example, economic recession.

Question 17

What is a fortuitous event?

Answer 17

A fortuitous event is one where it is accidental or unexpected. For example theft. Whilst this is not accidental as the person committing the act would have done this intentionally, this event is unexpected.

Question 18

Give an example of insurable interest.

Answer 18

-An item you personally own would be insurable interest.
-The contents of your home would be insurable interest.
-The items held in your factory would be your insurable interest.