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Chapter 1 - Fundamental principles of insurance Flashcards

1
Q

What are the 3 stages of risk management?

A

Risk identification
Risk analysis
Risk control

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2
Q

The timing delay between insurers receiving premiums and the occurrence of claims creates the what?

A

Premium reserve

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3
Q

Define a moral hazard?

A

That which is caused by the attitude and behavior of people e.g. carelessness or dishonesty.

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4
Q

What is a fundamental risk?

A

A risk that occurs on such a vast scale that it cannot be insured such as war, famine or economic recession.

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5
Q

What is an equitable premium?

A

This means that for a person to join the specified pool they must pair a equitable (fair) premium based on the risk they bring to the pool.

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6
Q

What is a financial risk?

A

A risk which can be quantified in money eg theft of car

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7
Q

Give an example of a high frequency low severity risk

A

Motor windscreen damage (lots of small claims)

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8
Q

If someone carries a risk themselves they are known as?

A

Risk seeking

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9
Q

Risk is defined in terms of?

A

Uncertainty and unpredictability

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10
Q

What policy covers the cost of replacing windows damaged in a department store

A

Glass

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11
Q

What is a non financial risk?

A

A risk which can not be quantified in money eg your choice of partner

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12
Q

What is a particular risk?

A

A risk that is localized or even personal in their cause and effect E.G. Factory fire, car crash Etc..

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13
Q

If someone takes out insurance on everything they can, they are known as?

A

Risk averse

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14
Q

What is risk pooling?

A

Risk pooling is an insurance risk management practice which groups larger numbers of people together to minimize the cost impact of the highest-risk individuals.

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15
Q

Define a hazard?

A

That which influences the operation or effect of the peril e,g, smoking

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16
Q

What is a financial control method?

A

Transferring risk by taking out insurance or by contract.

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17
Q

What are the main 4 things insurers will examine when deciding whether a risk is insurable?

A
  1. Fortuitous event
  2. Insurable interest
  3. Public policy
  4. Homogeneous exposure
  5. Pure risk (not speculative)
  6. Particular risk (some fundamental risks are insurable)
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18
Q

What are the different types of risks?

A 
Financial
Non-financial
Pure
Speculative
Particular
Fundamental
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19
Q

What is the law of large numbers?

A

Enables the insurer to predict the final cost of claims for one year as they are covering a large number of homogeneous (similar) exposures e.g. many cars, many houses.

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20
Q

Identify six benefits of insurance to the economy as a whole

A
  1. Releases capital
  2. Encourages businesses to expand
  3. Keeps employees in work
  4. Reduces losses
  5. Insurance companies are major investors
  6. Invisible exports
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21
Q

What is insurance essentially?

A

A risk transfer mechanism

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22
Q

The timing delay between claims occurring and eventually being settled/paid creates the what?

A

Claims reserve

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23
Q

Why is risk management important?

A

It reduces the potential for loss
Gives shareholders a greater degree of confidence,
Provides a disciplined approach to quantifying risks.

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24
Q

What is a pure risk?

A

A risk with the possibility of loss but no gain, where the best that can be achieved is a break-even situation. E.G travelling in a car is a pure risk as there is a chance you could crash.

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25
Give an example of a low frequency high severity risk
Earthquake not many claims but claims are large
26
What are the components of a risk?
Uncertainty level of risk peril hazard
27
What is a physical control method?
Locks on doors etc.
28
Identify 4 primary benefits of insurance to the insured
1. Risk transfer 2. Protection 3. Certainty 4. Peace of mind
29
What is a speculative risk?
A risk where there is a potential for gain, insurance does not apply to speculative risks. e.g. The lottery, Stock trading.
30
What severity and frequency is a train derailment?
Low frequency, high severity
31
Define a peril?
A specific risk or cause of loss, e.g. a fire
32
Identify six types of insurance that are compulsory in the U.K.
``` Employers liability Motor third party Solicitors professional indemnity Horse Riding Public Liability Dangerous Animals/Dogs Public Liability Insurance brokers professional indemnity ```
33
Which regulator is the prime regulator for insurers
Prudential Regulation Authority | PRA
34
Which regulator regulates insurance intermediaries
Prudential Regulation Authority | PRA
35
What are the PRA's objectives
promote safety and soundness of UK financial system | contribute to ensuring the insurance policyholders PRA's
36
Who is the lead regulator of the Lloyd's of London
PRA
37
Who regulates managing agents
PRA and FCA
38
Who regulates Lloyd's brokers and members agents
FCA
39
What is the FCA's strategic objective?
To protect and enhance confidence in | the U.K. financial system.
40
What are the FCA's three operational objectives
Consumer protection Integrity Competition
41
Which regulated fim risk category is most risky so firms get more intense supervision
Category 1
42
Which regulated firm risk category is least risky an includes most insurance brokers
Category 4
43
What are the three elements of the FCA's risk framework?
Firm systematic framework Event driven work Issues and products
44
What is the reporting system called under which the FCA gathers information on small firms?
GABRIEL
45
How often do low risk small firms have a "touch point" with the FCA
Every 4 years
46
Identify three areas where the FCA focus on:
Product governance End-to-sales processes Prevention of financial crime
47
Which Act encourages "whistle blowing" by reducing employers ability to punish whistle blowers?
Public Interest Disclosure Act 1998 (PDA)
48
What are Threshold Conditions?
The conditions a firm needs to meet to be authorised by PRA/FCA
49
Regulated firms must have a responsibilities map under what regime?
Senior Managers and Certification Regime
50
What are the regulators' rules which apply to senior managers called?
Rules of conduct
51
Identify four discplinary powers of the regulator
Public censure Financial penalties Prosecution for criminal offences Civil and less formal remedies eg injunctions
52
The difference between an insurers' assets and liabilities is known as?
Solvency margin
53
What are the three pillars in Solvency II
Pillar 1 Capital requirements Pillar II Risk management Pillar III Disclosure
54
Identify two ways an insurer can calculate their MCR and SCR
Standard formula | Internal model
55
To what level of confidence must captal be held in respect of the SCR
99.5%
56
To what level of confidence must captal be held in respect of the MCR
85%
57
What is the SCR?
Solvency Capital Requirement
58
What is the MCR?
Minimum Capital Requirement
59
What will be higher MCR or SCR?
SCR
60
What does ORSA stand for under what pillar of Solvency II is it required?
Own Risk and Solvency Assessment PIllar 2
61
Identify two reports insurers are required to provide under Solvency II Pillar 3 Disclosure which is public and which private?
Solvency Financial Condition Report (SCR) Public | Regulatory Supervisory Report (RSR) Private
62
Identify seven ways te PRA can intervene if an insurance company's capital is inadequate for the risks they face.
``` Restrict premium income Require more frequent accounts Require more information Prevent insurer accepting new business Require company to restore capital Impose requiremenst on investment policy Withdraw authorisation ```
63
Identify seven items in an insurance broker's Retail Mediation Activities Return
``` Accounting information Regulatory capital PI insurance Threshold conditions Training and competence Conduct of business data Product sales data FCA fees data Complaints (Eligible complaints to be reported twice yearly) ```

LM1 (9 decks)

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