Chapter 1 - Risk and Insurance Flashcards
What is a risk?
The possibility of an unfortunate occurrence.
Doubt concerning the outcome of a situation.
Unpredictability.
The possibility of loss.
The chance of gain.
Risk management process
Risk identification.
Risk analysis.
Risk control (potentially risk transfer).
Types of risk control
Physical control methods – physically putting measures in place to reduce risk.
Financial control methods – transferring risk using insurance or by contract.
Developing a good risk culture – educate on how to avoid or reduce risk.
Components of risk
Uncertainty.
Level of risk – assessed in terms of frequency and severity.
Peril – an event that gives rise to a loss e.g. car crash.
Hazard – something that influences the operation or effect of the peril e.g. drink driving. Can be categorised into physical and moral.
Insurable risks
Financial risks – must be measurable in financial terms excluding benefit policies (personal accident).
Pure risks – possibility of loss but not of gain, best case is break-even.
Particular risks – localised of personal in cause and effect.
Features of insurable risks
Fortuitous event – accidental or unexpected.
Insurable interest – legally recognised financial relationship between the insured and the object or liability.
Follows public policy.
Homogeneous exposure – a sufficient number exposures to similar to forecast likely extent of losses, uses law of large numbers.
Uninsurable risks
Non-financial risks – not measurable in financial terms.
Speculative risks – there is possibility of loss, break-even and gain.
Fundamental risks – caused outside of the control of an individual or group of individuals, effects are widespread and high severity, risks arise from social, economic, political, or natural causes.
Benefits of insurance
Cash flow – no money kept in reserve for potential losses.
Expansion of business.
Loss control.
Premiums invested.
Social benefits – encourages business activity and helps keep people in employment.
Pooling
Common pool – insures operate separate pools for different classes of insurance. Equitable premiums (fair contributions) – insurers evaluate elements of risk brought to the pool by each policyholder (discrimination factors).
Co-insurance
Between insurers – each insurer receives a proportion of premium and pays the same proportion of claims, the lead office is the first named insurer and carries the largest share of risk, applies mainly to the London Market.
Between the insured – the insured will retain an amount of risk with excess (small fixed sum) or deductible (large fixed sum).
Self-insurance
An individual or company have decided to carry the risk themselves. That can be all or part of the risk. They will choose to self-insure the first (e.g. £50,000) is called the retention which is usually a substantial sum.
Classes of insurance
Personal lines – protects a policyholder from loss or damage to personal property or damages which a policyholder may be held personally responsible.
Commercial lines – protects a business from loss of business property or damages which the company may be held liable.
