Chapter 1 Risk and Insurance

Question 1

Define risk

Answer 1

“the chance of loss”.

Is the chance that an event could occur that would leave you in a worse situation rather than a better one.

Chance, uncertainty

Question 2

Name the components of risk.

Answer 2

1. Level of risk

2. Value at risk

**3. Severity of loss **

3. Cause of loss

Question 3

Name the levels of risk

Answer 3

1. Values at risk

2.Severity of loss

Question 4

Define “peril” and give at least TWO (2) examples of perils.

Answer 4

Is an event that will give rise to a loss.

Examples, peril of fire, lightning.

Question 5

Define “hazard” and give at least TWO (2) examples of hazard.

Answer 5

is a factor that may influence the outcome of a loss. Examples, slippery floors, frayed carpets.

Question 6

Differentiate between risk and chance.

Answer 6

Risk is unfavourable outcome.

Chance is favourable outcome.

Both imply doubt about the outcome

Question 7

Differentiate between speculative risk and pure risk

Answer 7

**Speculative - **a chance of loss or a chance of profit (not insurable

Pure risk - chance of loss but no chance of profit (insurable)

Both are chance of loss

Question 8

Give examples of the following types of risks to which individuals are exposed:

Answer 8

Personal - loss of income; loss of life, illness

Property - loss of home, vehicle, belongings

Liability - accidentally hurt someone due to carelessness; injury to others due to frayed carpets in our home; injury caused by our pet to the mailman delivering our mail.

Question 9

Give examples of the following types of risk to which businesses are exposed:

Answer 9

Personal - inability to work due to illness; a partner dies and the existing one cannot afford to buy out heirs of deceased partner; business owner has car accident

Property - loss of building due to fire; loss of wheat crop due to windstorm; loss of stock due to theft.

Liability - customer trips on wet floor in the store; bad batch of cosmetics that caused severe skin blistering on a customer;

Question 10

What does a risk manager do?

Answer 10

Carry out the function of risk management.

identifying

measuring - likelihood and severity

controlling

Question 11

Define risk management

Answer 11

Risk management - is the minimization of the detrimental effects of risk by identifying, measuring and controlling the risk.

Question 12

How might risk be identified?

Answer 12

Risk can be identified by inspection. Does it cause:

Direct damage to property

Business interruption

Liability

Employer’s liability

Fidelity

Question 13

How is risk measured?

Answer 13

Loss frequency - determining the likelihood of each peril occurring.

Loss severity - severity of the resulting loss or damage.

Question 14

What are some methods of controlling risk?

Answer 14

1. Reduce by preventive effort

2. Assume or Retain the risk

3. Transfer of risk - INSURANCE

Question 15

Explain what it means to be indemnified.

Answer 15

**To be indemnified is to be put back to the same financial position prior to the loss. **

Having insurance and be compensated for the loss enables individuals and businesses to continue on with their lives.

Question 16

Explain THREE (3) ways of assuming or retaining risk.

Answer 16

Three ways of assuming or retaining risk is by:

1. Ignoring risk - ignore and hope for the best

2. Self-insure - captives

3. Transfer of risk - transferring it to someone who has better financial resources. (Insurance)

Question 17

How does purchasing insurance enable an individual or business to control risk?

Answer 17

Purchasing insurance is transferring risk to someone who has better financial resources and thus a better ability to withstand loss.

It is an effective way to control risk.

Question 18

Provide a definition of insurance.

Answer 18

Insurance is the undertaking by one person to:

• *Indemnify** another person against
• *Loss or liability for loss** with respect to a certain
• *Risk** or
• *Peril**, to which
• *the object of the insurance** may be exposed; or
• *to pay a sum of money** or
• *other thing of value** upon

the happening of a certain event.

Question 19

What are reserves?

Answer 19

Reserves - are funds required by law, to be set aside to pay for losses reported but not yet paid or not reported and to cover unearned premiums.

Question 20

What expenses must insurance premiums cover.

Answer 20

1. Reserves

2.Unearned premiums

Question 21

What are unearned premiums?

Answer 21

Unearned premiums - that portion of the premium that has not yet been earned on a given policy.

Question 22

What is the main objective of insurance?

Answer 22

Is to spread the losses of a small number of individuals over as great a population as possible. This way insurance is affordable to all.