Chapter 1 - Fundamental principles of insurance Flashcards
What is the definition of risk?
Uncertainty
Unpredictability
Danger
What is a risk transfer mechanism?
Owner pays premium to insurer
Insurer covers future unknown cost of the risk
What is risk seeking?
Willing to carry the risk themselves
What is risk adverse?
Minimising the risk they are exposed to
What do risk managers do?
Take control and develop a formal strategy
Manage risks that affect business’
What is the body for risk managers?
Association of insurance risk managers
AIRMIC
What are 3 benefits of risk management?
Reduces potential for loss
Increases shareholder confidence
Disciplined approach to quantify risk
Is transferring risk the first or last stage in the risk management process?
Last
Who usually does financial planning for an individual?
Financial advisor
Examples of general insurance that are compulsory?
Third party motor
Homeowners mortgage
Why do people not take up insurance?
Individuals risk appetite
Inability to afford insurance protection
What is the definition of risk management?
Identification, analysis and economic control of risks that can threaten the assets or earning capacity of an enterprise
What is good risk management?
Identification and treatment of defined risks
Continuous and developing process embedded in a firms strategy
Covers the firms current, past and further activities
What is identification in risk management?
Discovering existing and future threats
Not all insurable but must be managed
Can benefit from insurers advice without coverage e.g., physical examination survey
What is analysis in risk management?
Using past data to evaluate/analyse the risk
Insurers using same elements when considering the rating of a risk
What is risk control in risk management?
Course of action in place to control, reduce or eliminate the risk
Elimination is the most effective but costly and impractical
Subjective - is it reasonable compared to the cost of the risk happening
What are the two aspects to control a risk?
Physical controls e.g., alarm
Financial controls e.g., well-worded contracts
Can insurers impose requirements and recommendations designed to improve a risk after a survey?
Yes
Improves risk to acceptable standard
Offers premium reduction as an incentive
What organisations do insurers work with to research areas of loss prevention and control?
Building research establishment (BRE)
Fire protection association (FPA)
What type of work do the BRE and FPA undertake?
GUIDELINES - providing construction guidelines
MODELS - researching new construction models
PROCESSES - provide reports on new industrial processes
Do insurers have to stay up to date with knowledge of potential clients businesses?
Yes
What are the three components of risk?
Uncertainty - unable to predict
Level of risk
Peril and hazard
How is risk usually assessed?
Frequency - how often
Severity - how serious if it does happen
Why is the frequency/severity profile important to underwriters?
Smooth trends support insurers
Forward plan for infrequent large catastrophe-type claims
Example of high frequency and low severity
Private motor insurance
Many losses for damage of vehicles at low cost
Example of low frequency and high severity
Aircraft accident
Few losses but high cost damage
What is the definition of a peril?
Gives risk to a loss e.g., fire, flood, explosion, lightning, collision, dishonesty
What is the definition of a hazard?
Influences the effect of a peril
What are the two types of hazard?
Physical hazard
Moral hazard
What is a physical hazard?
Includes any measurable dimension of the risk
e.g., security protection at a shop, construction of a property, age and type of a car
What is a moral hazard?
Attitude and behaviour of people
Can be from the insurer themselves
Is a financial risk insurable?
Yes
Is a non-financial risk insurable?
No
What is a pure risk and is it insurable?
Possibility of a loss but not a gain
Insurable
Break-even is the best case scenario
e.g., travelling in an aircraft
What is a speculative risk and is it insurable?
Aim to gain but could break-even or fail
Not insurable
e.g., lottery
What is a particular risk and is it insurable?
Localised or personal in cause and effect
Insurable
e.g., storm over a region - not all properties are damaged
What is a fundamental risk and is it insurable?
Vast scale risks that arise from social, economic, political or natural causes
Uninsurable as lack of appetite from UWs
e.g., risk of war
What features must apply for a risk to be insurable?
Fortuitous event - accidental or unexpected and not inevitable
Insurable interest - legally recognised financial relationship between the insured and object
Not against public policy - not against what society thinks is the right or moral thing to do
Homogenous exposure - similar risks, historical patterns and trends to forecast future losses aka ‘objective risks’
What is pooling of risk?
Insurer groups together small risks
Premiums from many insureds -> POOL -> payments to compensate losses of the few
Separate pools for each class of business
What is needed for pools to work for an insurer?
Premiums must be large enough, in total, to meet the losses in any one year
Cover the operating costs
Profit for the insurer
What is the law of large numbers?
More insurers in the pool = higher chance of expected outcome
Works for premiums vs claims
What is an equitable premium?
Fair premiums paid to the pool by insureds
Different elements of risk to calculate equitable premium
What are the reasons for buying insurance?
Attitude to the potential risk
What price they are prepared to pay
Choice of insuring the risk
What are the primary functions of insurance?
Spreading the risk
Providing a degree of certainty
Transferring risk
What are the secondary functions of insurance?
Companies do not have to set aside large sums of money
Companies can be confident to expand business
Jobs protected
Losses reduced - size and number
Benefits economy - insurers invest in funds
‘Invisible’ exports - money into the UK via London market
What act made it compulsory for employers in GB to employers liability insurance?
Employers’ Liability (Compulsory Insurance) Act 1969
Why are some forms on insurance compulsory?
Provide funds for compensation
In response to national concerns
Reputation
What does the Employers’ Liability (Compulsory Insurance) Act 1969 cover?
Pay employees who are injured, diseased etc during their employment
What is the minimum required limit of indemnity for employers liability insurance?
> £5m is minimum
> £10m is standard in London Market
Is there a requirement for employers to display their employers liability certificates?
Yes
What database contains all new and renewed employers liability policies?
Employers’ Liability Tracing Office (ELTO)
What is the act that made motor insurance compulsory?
Road Traffic Act 1988
What act made it compulsory for riding establishments to have public liability insurance?
Riding Establishments Act 1970
What act made it compulsory for individuals to own wild animals or dangerous dogs?
Dangerous Wild Animals Act 1976
Dangerous Dogs Act 1991
What act made it compulsory for solicitors to have professional indemnity insurance?
Solicitors Act 1974
Do insurance intermediaries authorised by the FCA have to have PI insurance?
Yes
Appointed representatives and introducer appointed representatives do not require as undertaken by principal that is responsible
What is the CII Code of Ethics?
Treat customers fairly
What is the role of claims personnel?
Deal with claims
Claims that are/are not valid
Reserves - calculate funds to set aside
Instruct necessary experts
Settle claims cost effectively
