Chapter 1 - Risk and Insurance

Question 1

Define peril.

Answer 1

• is an event that will give rise to a loss.
• often it is beyond the control of anyone who may be involved.

EXAMPLES:
- fire, theft, explosions, storm, flood, vandalism

Question 2

Define hazard.

Answer 2

• is a factor which may influence the outcome of a loss.
• can increase the likelihood of a peril operating( or a loss), or make the result more serious should a peril operate.

EXAMPLES:
- use of damaged extension cord, bad wiring, slippery floors, frayed carpets

Question 3

What are a few types of risks?

Answer 3

• house

- automobile

Question 4

What are the classifications of risk?

Answer 4

• speculative risk

- pure risk

Question 5

Define risk.

Answer 5

• the uncertainty of an outcome
• possibility or chance of a loss
• where the outcome could leave us in a worse position than we are in right now.

Question 6

Define speculative risk.

Answer 6

• exists where there is either a chance of loss or a chance of profit.
• not insurable

EXAMPLES:

• gambling
• starting own business

Question 7

Define pure risk.

Answer 7

• entails a chance of loss but no chance of profit
• insurable

EXAMPLES:
- unlocked car, storing flammable liquids close to furnace

Question 8

Define uncertainty.

Answer 8

• implies doubt about the future
• based on a lack of knowledge, or imperfect knowledge
  (the basis of risk is a lack of knowledge.)

Question 9

What does chance imply?

Answer 9

• some doubt about the outcome in a given situation
• the outcome is normally a favourable one
• has a positive connotation

Question 10

What are the general types of insurable risk?

Answer 10

1) Personal risk - premature death, physical disability, unemployment, old age
2) Property risk - home, belongings, car
3) Liability risk - arise out of obligations to other people

EXAMPLES:

• if pets cause injury or property damage
• if children cause injury or property damage
• accidental injury to others
• owning/occupying premises and keeping it safe

Question 11

What are personal risks to a business?

Answer 11

• unable to manage company
• unable to fulfill obligations as shareholder
• if they become incapacitated and unable to work

Question 12

What are property risks to a business?

Answer 12

• risk of perils damaging business property (building, livestock, equipment, manufactured goods)
• risk of not being able to pay bills
• risk of goods being damaged in transit

Question 13

What are liability risks to a business?

Answer 13

• arising out of the ownership, use or occupancy of premises; sale of products; safety of employees

EXAMPLES:

• customer trips on premise
• childs sweater catches fire
• lotion causes skin blisters
• accidental spillage of gas underground
• employee suffers injury due to scaffolding collapsing
• defamation of character aka slander

Question 14

Define risk management.

Answer 14

• is the minimization (at a minimum cost) of the detrimental effects of risk by
  1) identifying the risk
  2) measuring the risk
  3) controlling the risk

Question 15

How to identify risks.

Answer 15

• site inspection
• view financial records
• view historical records
• interview employees

EXAMPLES:

• direct property damage
• business interruption
• liability (public)
• employer’s liability (employees)
• fidelity (stealing money)

Question 16

How to measure risks.

Answer 16

1) loss frequency
- determine the likelihood of each peril occurring
(ex - weather patterns)
2)loss severity
- severity of the resulting loss or damage/ level of damage caused
(larger house = larger risk)

Question 17

How to control risks.

Answer 17

1) reduce the risk by preventative measure
(smoke detectors, alarms, sprinklers)

2) assume or retain the risk
- can self-insure
i) can have fund set aside in the event of a loss
ii) large corp may use a captive (own offshore ins. comp.)

3) transfer the risk
- to someone who has better financial resources and better ability to withstand loss
- as a business could seek insurance from several companies to cover larger amounts (aka subscription policy)

Question 18

Define indemnify.

Answer 18

• means to put back in the same financial position as just prior to the loss.

Question 19

Define insurance.

Answer 19

• is undertaking of 1 person to indemnify another person against loss or liability for loss in respect of 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.
• the method of sharing losses of the few individuals in a group who suffer them among the many members of that group who do not.

Question 20

Define reserves.

Answer 20

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

Question 21

Define unearned premiums.

Answer 21

• consist of the portion of the premium that has not yet been earned on a given policy. Since the premium paid for a policy does not belong to an insurer in its entirety until the last day of the policy period, funds must be kept available to refund any unearned premium should the policy be cancelled at some point during its term.