Chapter 1 - Fundamentals Flashcards
What is the definition of risk?
3 points
Unfortunate happening
Unpredictability
Risk being insured, subject matter or thing insured
What are the 2 attitudes to risk?
Risk seeking
Risk adverse
What is the definition of risk management?
The identification, analysis and economic control of those risks which can threaten the assets or earning capacity of an enterprise
What are the 3 benefits of risk management?
Reduces potential for loss
Increases shareholder confidence
Disciplined approach to quantifying risk
The 3 stages of risk management
Identification - continuous and developing process of identifying risks. Insurer may give a report.
Analysis- risk manager can examine past data to evaluate risk
Control - control, reduce or eliminate risk
2 main ways of controlling risk
Physical - fire alarms etc. Can be an imposing requirement
Financial - contract wording, e.g. Cash responsibility when carried on person
What are the associations for risk? 3
What are the 3 reasons for them?
Building research establishment (BRE), fire protection association (FPA). The Loss prevention council forms part of both of these
New construction methods, guidelines, reports on new processes to keep insurers informed
Components of risk 3
Uncertainty
Frequency and severity
Peril and hazard
Financial risk
A risk that can be financially measured such as by loss of profit.
Insurable
Non-financial risks
Such as the loss of a family heirloom that has sentimental value
Not insurable
Pure risk
A risk that is purely loss such as a fire etc. Applies to commercial setting
Can be insured
Speculative risk
Could be loss or gain
Lottery, stocks
Cannot insure risks that could gain
Fundamental risk
A risk that is so vast it is not insurable
War and nuclear risks
Insurers do not have capacity
Can appear in other London Market insurance such as marine cargo covered for war
Particular risk
A risk which is localised
E.g. There may have been a storm in a region, but it only affected some people
This can be insured. This is personal and therefore different to pure risks
Name the 3 insurable risks
Financial
Pure
Particular
4 conditions that the 3 insurable risks need to meet
Fortuitous- unexpected
Insurable interest - legally recognised relationship between object and person e.g. Car
Public policy- cannot insure against criminal fines
Homogenous exposures - helps to have historic data so that potential for loss is more accurate and insurer can gage capacity
Description of pooling risk
Equitable premiums put into pool which is used to cover losses
Each risk entered must have a proportionate premium (risk element)
Different pool for each class
Law of large numbers
If there is a larger number then the probability is closer to the expected e.g. Flipping a coin
Definition of peril and hazard
Hazard gives rise to a peril
Sprinkler and fire
Moral hazards - training of employees is a ‘good hazard’
3 primary functions of insurance
Spreading risk between insurers
Degree of certainty for premium
Transference of risk
6 secondary functions of insurance
No safety net for business Expansion Job protection Lower losses due to risk management Economy - insurers are investors Invisible exports
3 main reasons for compulsory insurance
Funds for compensation
Response to national concerns
Reputation of profession (e.g. Solicitors)
Employers liability
1969
Minimum 5 mil
Employers liability tracing office allows to trace policies. Insurers publish to ELTO 3 months after inception
Road traffic act 1988
Third party property and bodily damage
Related to movement of good under treaty of Rome
EU directed changes such as tracing insurer from license plate
Riding establishments
Act 1970
Insured against claims from using one of the establishments horses
Dangerous wild animals 1976, dangerous dogs 1991
Local authority must deem adequate
Insurers offer as extension of another policy such as liability of household
Professional indemnity insurance
Solicitors act 1974
Professional negligence
If insurance intermediary is covered by the FCA it must have cover
Appointed representatives and introducers use insurers cover
Cover up to 1 mil
Claims personnel
Identify non valid claims
Assess and calculate costs
Instruct experts
Provide claims data
