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LM1 > Chapter 1: Fundamental Principles of Insurance > Flashcards

Chapter 1: Fundamental Principles of Insurance Flashcards

1
Q

Define ‘risk’

A

There is no universally recognised definition of the term risk :(

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2
Q

What are three ways the term ‘risk’ is used in the insurance marketplace?

A

A risk can be a peril being insured, the subject matter of the insurance, or or the thing insured and the scope of the cover required

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3
Q

Define ‘risk management’

A

“The identification, analysis, and economic control of those risks which can threaten the assets or earning capacity of an enterpirse”

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4
Q

What is one way to define ‘insurance’?

A

A risk transfer mechanism

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5
Q

What is the simplest way to describe insurance?

A

The insured pays a known premium to the insurer, whp accepts the future unknown cost of the insured risk

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6
Q

Why might insureds take out insurance?

A

For peace of mind, it may be compulsory, or another party has a financial interest in the ite, to be insured

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7
Q

What is an example of compulsory insurance for private individuals in the UK?

A

Third party motor, public liability if you have a dangerous pet

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8
Q

What is an example of compulsory insurance for businesses in the UK?

A

Motor insurance and employer’s liability insurance

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9
Q

What is an exmple of when another party has a financial interest in an item, thus it needs insurance?

A

Banks insist on houses on mortgage having insurance

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10
Q

Define ‘risk seeking’

A

When people are willing to carry certain risks themselves

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11
Q

Define ‘risk averse’

A

When people are inclined to minimise the risk to which they are exposed

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12
Q

What is AIRMIC?

A

Association of Insurance Risk Managers (in Industry and Commerce)

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13
Q

Why is risk management important?

A

It reduces the potential for loss, it gives shareholder confidence that the business is being run properly, and it provides a disciplined approach to quantifying risk

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14
Q

What are the three steps of risk management?

A

Identification, analysis, control

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15
Q

Can all identified risks be insured?

A

No, but if a business idnetifies risks, it must manage them

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16
Q

What does risk analysis actually involve?

A

The likelihood of the risk happening, and the likely impact

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17
Q

What is the most effective way to control a risk?

A

Eliminate it, but this can be impractical

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18
Q

How can insurers help advise businesses on how to improve risk?

A

Pre-risk surveyors reports can make recommendations

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19
Q

What are groups external to the insurance industry, where insurers help mitigate risk?

A

Building Research Establishment, and Fire Protection Association

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20
Q

What are the three components of risk?

A

Uncertainty, level of risk, and peril and hazard

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21
Q

Define ‘uncertainty’

A

Doubt about the future, as we cannot predict what will happen

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22
Q

How is level of risk usually measured?

A

Through its frequency and severity

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23
Q

Define ‘frequency’

A

How commonly an event happens

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24
Q

Define ‘severity’

A

How severe an event is

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25
Q

Why do insurers want to be abe to predict the frequency and severity of cases?

A

We want to forward plan to be able to react to catastrophe type claims

26
Q

Define ‘peril’

A

What gives rise to a loss- eg fire

27
Q

Define ‘hazard’

A

What influences the operation or effect of the peril

28
Q

List some examples of perils

A

Fire, flood, explosion, lightning, collision, dishonesty

29
Q

What is a physical hazard?

A

Physical characteristics of the risk and any measurable dimension of it

30
Q

What is a moral hazard?

A

It arises from the attitude and behaviour of people- essentially the worry the insured will act recklessly once they have insurance

31
Q

How is moral hazard categorised?

A

Good or poor

32
Q

Define ‘financial risks’

A

A risk which can be financially measured- the value of a phone

33
Q

Define ‘non-financial risks’

A

A risk which cannot be financially measured- the sentimental value of a family hierloom

34
Q

Is insurance appropriate for non-financial risks?

A

No!

35
Q

Define ‘pure’ risks

A

A risk where there is a possibility of a loss, but not a gain.

36
Q

Define ‘speculative’ risks

A

A risk where there is a possibility of a gain

37
Q

Is insurance appropriate for speculative risks?

A

No!

38
Q

Define ‘particular risks’

A

A risk which is personal or localised in its cause and effect

39
Q

Define ‘fundamental risks’

A

A risk that arises from social, economic, political, or natural causes, and is widespread in its effect

40
Q

Are fundamental risks insurable?

A

Legally, yes. In practice, there is often a lack of appetite for them, especilly outside of the London Market

41
Q

What other features are there for a risk to be insurable?

A

There should be a fortituous event, an insurable interest, the risk must not be against public policy, and it must not be a one off

42
Q

Define ‘fortituous event’

A

An accidental or unexpected event, but not an inevitable one

43
Q

Define ‘insurable interest’

A

The legally recognised financial relationship between the insured and the object being insured

44
Q

Define ‘homogeneous exposures’

A

Similar risks. Insurers like these as they help concretise ideas of pricing/coverage

45
Q

Are homogenous exposures a necessity?

A

No, just an ideal

46
Q

Define ‘pooling of risk’

A

The losses of the few who suffer misfortune are met by the contributions of the many, who are exposed to similar potential loss.

47
Q

What is the law of large numbers?

A

When there are a large number of similar situations, the actual number of events occurring tends towards the expected number

48
Q

How many pools do insurers have?

A

As many as they have lines of business

49
Q

What factors will a business consider when deciding to purchase insurance?

A

Their attitude to potential risk, the price they are prepared to pay for the peace of mind, the extent to which they feel they have a choice about insuring risk

50
Q

What are the primary functions of insurance?

A

Spreading the risk, providing a degree of certainty, and transferring risk

51
Q

What are the secondary functions of insurance?

A

Companies don’t have to set aside large sums of money to deal with loss, this money can be used to expand their business, and jobs can be protected. Losses are also reduced in size and number, insurers invest funds and benefit the economy, and it helps premiums flow into london

52
Q

Define ‘risk transfer’

A

Moving risk from one party to another

53
Q

Which law made employer’s liability insurance compulsory?

A

Employer’s Liability (Compulsory Insurance) Act 1969

54
Q

Who regulates employer’s liability insurance from 1st April 2011?

A

The Employers’ Liability Tracing Office. They have a database.

55
Q

What act made motor insurance mandatory?

A

The Road Traffic Act1988- but this is an area which has been heavily influenced by EU directives

56
Q

What does the Riding Establishments ACt 1970 say?

A

All riding establishments must have public liability insurance

57
Q

Is it compulsory to have insurance for dangerous dogs?

A

Yes, but the nature of this insurance is not defined in the Dangerous Dogs Act 1991

58
Q

Who is professional indemnity insurance compulsory for?

A

Solicitors (Solicitors Act 1974) and insurance intermediaries

59
Q

What is the insured’s experience of insurance centred on?

A

Claims handling

60
Q

What is the approximate minimum level of professional indemnity insurance intermediaries are required to have for a single claim, under FCA rules?

A

£1m

61
Q

How are risks typically identified?

A

Through physical examination or survey

62
Q

How are risks typically analysed?

A

Through analysis of past data

LM1 (9 decks)

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