COMPONENTS OF RISK

Question 1

What are the 3 components of risk?

Answer 1

• Uncertainty
• Level of risk
• Peril and hazard

Question 2

How is the level of risk assessed?

Answer 2

Frequency and severity

Question 3

Example of high frequency + low severity?

Answer 3

Motor insurance claims

Question 4

Example of low frequency + high severity?

Answer 4

Oil spillages

Question 5

What is a peril?

Answer 5

That which gives rise to a loss.

Question 6

What is a hazard?

Answer 6

That which influences the operation or effect of the peril.

Question 7

Example of a peril?

Answer 7

Lightning

Question 8

What is a physical hazard?

Answer 8

Relates to the physical characteristics of the risk

Question 9

What is a moral hazard?

Answer 9

It arises from the attitude and behaviour of people. In insurance, this is usually the conduct of the insured and their employees and that of society as a whole.

Question 10

Example of a moral hazard?

Answer 10

Carelessness - A driver’s lack of care can increase the chance of an accident happening and its severity.

Question 11

Example of a physical hazard?

Answer 11

Security protection at a shop - The greater the security protection, the better the physical hazard level as it may even prevent a loss altogether.