Chapter 1 - Fundamentals

Question 1

What is the definition of risk?

3 points

Answer 1

Unfortunate happening
Unpredictability
Risk being insured, subject matter or thing insured

Question 2

What are the 2 attitudes to risk?

Answer 2

Risk seeking

Risk adverse

Question 3

What is the definition of risk management?

Answer 3

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

Question 4

What are the 3 benefits of risk management?

Answer 4

Reduces potential for loss
Increases shareholder confidence
Disciplined approach to quantifying risk

Question 5

The 3 stages of risk management

Answer 5

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

Question 6

2 main ways of controlling risk

Answer 6

Physical - fire alarms etc. Can be an imposing requirement

Financial - contract wording, e.g. Cash responsibility when carried on person

Question 7

What are the associations for risk? 3

What are the 3 reasons for them?

Answer 7

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

Question 8

Components of risk 3

Answer 8

Uncertainty
Frequency and severity
Peril and hazard

Question 9

Financial risk

Answer 9

A risk that can be financially measured such as by loss of profit.
Insurable

Question 10

Non-financial risks

Answer 10

Such as the loss of a family heirloom that has sentimental value
Not insurable

Question 11

Pure risk

Answer 11

A risk that is purely loss such as a fire etc. Applies to commercial setting

Can be insured

Question 12

Speculative risk

Answer 12

Could be loss or gain
Lottery, stocks
Cannot insure risks that could gain

Question 13

Fundamental risk

Answer 13

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

Question 14

Particular risk

Answer 14

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

Question 15

Name the 3 insurable risks

Answer 15

Financial
Pure
Particular

Question 16

4 conditions that the 3 insurable risks need to meet

Answer 16

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

Question 17

Description of pooling risk

Answer 17

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

Question 18

Law of large numbers

Answer 18

If there is a larger number then the probability is closer to the expected e.g. Flipping a coin

Question 19

Definition of peril and hazard

Answer 19

Hazard gives rise to a peril
Sprinkler and fire
Moral hazards - training of employees is a ‘good hazard’

Question 20

3 primary functions of insurance

Answer 20

Spreading risk between insurers
Degree of certainty for premium
Transference of risk

Question 21

6 secondary functions of insurance

Answer 21

No safety net for business
Expansion
Job protection
Lower losses due to risk management
Economy - insurers are investors
Invisible exports

Question 22

3 main reasons for compulsory insurance

Answer 22

Funds for compensation
Response to national concerns
Reputation of profession (e.g. Solicitors)

Question 23

Employers liability

Answer 23

1969
Minimum 5 mil
Employers liability tracing office allows to trace policies. Insurers publish to ELTO 3 months after inception

Question 24

Road traffic act 1988

Answer 24

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

Question 25

Riding establishments

Answer 25

Act 1970

Insured against claims from using one of the establishments horses

Question 26

Dangerous wild animals 1976, dangerous dogs 1991

Answer 26

Local authority must deem adequate

Insurers offer as extension of another policy such as liability of household

Question 27

Professional indemnity insurance

Answer 27

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

Question 28

Claims personnel

Answer 28

Identify non valid claims
Assess and calculate costs
Instruct experts
Provide claims data