Chapter 1: Risk and Insurance Flashcards
What term describes an individual who is keen to remove/transfer risk wherever possible?
Risk adverse
A factory installing sprinklers is an example of what activity?
Risk control
What 2 characteristics are used to assess the level of risk?
Frequency and severity
What are the 4 key components of risk?
Uncertainty, level of risk, peril, and hazard
Give an example of a high frequency, low severity, event
Broken windscreen/window, minor car accident, etc (anything that could happen often but doesn’t cause a high cost)
Give an example of a low frequency, high severity, event
Plane crash, earthquake, subsidence, any other natural catastrophe etc
What is the difference between a physical and moral hazard?
A physical hazard relates to the physical characteristics of the risk itself. A moral hazard relates to the characteristics and behaviour of people (usually the insured)
Give an example of a physical hazard
Security systems, fire alarm/sprinklers, construction of the building, location, vehicle modifications
Give an example of a moral hazard
Occupation, convictions, claim history, experience, company policies and attitude towards health and safety, carelessness, dishonesty
What is the definition of a peril?
An event that causes a loss
What is the definition of a hazard?
Something which influences a peril. Can have a good or poor impact
A fire is caused by a smoker in bed. What is the peril and what is the hazard?
Peril = Fire Hazard = Smoker
What two words best describe risk?
Uncertainty and unpredictability
What is risk management?
A way of taking control and developing a formal strategy to deal with various risks that may affect businesses
What is AIRMIC?
Association of Insurance and Risk Managers in Industry and Commerce
What are the three steps in risk management?
- Risk identification
- Risk analysis
- Risk control (this includes risk transfer ie insurance)
What are the three categories of internal risk control?
Detective controls - detect errors or irregularities
Corrective controls - correct errors or irregularities
Preventative controls - prevent errors or irregularities from occurring in the first place
A fireworks factory is inspected by insurers and found to have excellent safety protocols and good staff training. What are these examples of?
Good moral hazard
In general, what 3 classifications of risk are insurable?
Some exceptions, eg personal accident/sickness
Pure
Financial
Particular
What is a “pure” risk?
A risk where there is the possibility of loss but not of financial gain. For example you couldn’t insure your gambling activities because there is the possibility you could win money
What is a “financial” risk?
The outcome of an adverse event can be measured in financial terms. For example property damage or loss of profits/income
What is a “particular” risk?
Localised, or even personal, in their cause and effect. Associated with one person or event
For a risk to be insurable, what 3 features must it have?
- The event insured against must be fortuitous (sudden, accidental, and unexpected)
- There must be insurable interest
- The risk must not be against public policy
What are “homogenous exposures”?
A sufficient number of exposures to similar risks and their claims history that enables an insurer to forecast expected frequency and likely extent of losses
What 3 kinds of risk are not insurable?
- Non-financial: Outcome is not measurable in monetary terms
- Speculative: Possibility of financial gain
- Fundamental: Widespread effects caused by something outside the control of any one individual or group. For example economic recession, war, famine
Name some benefits of insurance
- Risk transfer mechanism
- Peace of mind
- Encourages enterprise/expansion of business
- Reduction of losses + keeps people in employment
- Invisible export (government income via IPT)
- Investment by insurers (premium pool invested to earn income for the insurer, benefits both parties)
What is insurance?
A legal agreement (contract) between the insured (first party) and insurer (second party) to provide financial compensation in the event of a financial loss
What is meant by “the common pool”?
The contributions of the many pay for the losses of the few
What is the law of large numbers?
The larger the number of similar risks and claims the insurer deals with, the more accurately they can forecast and set premiums
What is meant by “equitable premium”?
A fair contribution - the size of the premium reflects the size of the risk brought into the pool
When pooling risk, what does the law of large numbers allow insurers to reliably predict?
Future claim payments
What is “co-insurance”?
An insurer agrees to share a risk with one or more co-insurers. They issue a collective policy and each sign for an agreed percentage. Each insurer receives that agreed percentage of the premium, and pays the same percentage of any losses that occur
What is self insurance?
The insured decides not to transfer some of the risk, but to cover it themselves. For example the insured may pay the first £50,000 of any loss and take out insurance on losses above that amount. The amount is called the retention
Which of the following can insurance cover be purchased for?
A: An investment loss on the stock market
B: Dishonesty of an employee
C: Failure of a business venture
D: War damage to a domestic property
B: Dishonesty of an employee
Fidelity guarantee
What must the common pool be large enough to cover?
The losses in any one year + costs of operating the pool + an element of profit
A business that regularly puts aside money to cover the costs of accidental damage is an example of what?
Self insurance
What is dual insurance?
Where an event is covered by two separate policies. For example a homeowners policy that covers personal possessions outside the home and a travel insurance policy
What is a benefits policy?
Where there is no way of precisely valuing a loss (eg death or loss of sight) policies can provide pre-agreed amounts as payments or lump sums.
What was the Test-Achats judgement? What act transposed this into UK law?
Insurers cannot use gender as a factor in pricing or benefits. Equality Act 2010
What kinds of insurance were most impacted by the changes in law due to the Test-Achats judgement?
Income protection, motor insurance + health/critical illness insurance
(Test-Achats means insurers cannot use gender as a factor in pricing - Equality Act 2010)
Money from premiums is held until a claim is made. What does this create?
A premium reserve
In co-insurance who is liable to the insured?
Each insurer is separately liable to the insured for their proportion of any claim
In co-insurance how will a claim be settled?
Usually the lead office will settle the claim and recoup the losses from each co-insurer
(For large claims each insurer may send their share of the settlement to the lead office first which is when passed to the insured)
What are the different ways of controlling a risk?
- Physical control measure - eg locks
- Financial control measure - eg insurance
- Developing a good risk culture
