Fundamental Principles in Insurance (Risk & Insurance)

Question 1

What are the primary functions of insurance?

Answer 1

Spreading Risk
Providing Certainty
Transferring Risk

Question 2

What are the secondary functions of insurance?

Answer 2

Do not have to set aside large sums of money
Expand business
Job protection
Loss reduction
Insurers invest in funds
Invisible Exports

Question 3

What are ‘invisible exports’

Answer 3

Services are sold and exported overseas (Risks overseas are insured in London)

Question 4

What is the basic concept of insurance?

Answer 4

Contributions of the many, cover the losses of a few

Question 5

What is Pooling of Risk?

Answer 5

Insurance company takes premiums from all those with risks and pays for losses from this

Question 6

How is a premium determined?

Answer 6

The premium is proportionate to the risk brought to the pool.

Question 7

What is the Law of Large Numbers?

Answer 7

Large number of similar situations provides more accuracy over the actual number of an event (E.g exact number of loss)

Question 8

What are the features of an Insurable Risk?

Answer 8

Fortuitous Event
Insurable Interest
Not against Public Policy
+ Homogenous Exposure (Not one-off)

Question 9

What are the categories of Risk?

Answer 9

Financial / Non-Financial
Pure / Speculative
Particular / Fundamental

Question 10

What makes a Risk insurable?

Answer 10

Financial - Measurable.
Pure - Not based on gain.
Particular - Local in the effect.

Question 11

What are the components of a Risk?

Answer 11

Uncertainty
Level of Risk
Peril / Hazard

Question 12

Difference between Peril and Hazard

Answer 12

Peril - The cause
Hazard - The environment which gives rise to Peril

Question 13

Types of Hazards?

Answer 13

Physical - Physical, measurable characteristics of risk
Moral - Attitude or behaviour of people (Not measurable)

Question 14

Definition of Risk Management?

Answer 14

Identification, analysis and economic control of those risks which can threaten the assets or earning capacity of an enterprise

Question 15

Definition of Risk Identification?

Answer 15

Examination of activities of organisation in order to ascertain features which may provide hazardous to furthering its objective

Question 16

Definition of Risk Analysis?

Answer 16

Looking at past data to determine what actions to take on current risks.

Question 17

What are the two attitudes to risk?

Answer 17

Risk Averse - Look to minimise risk where possible.
Risk Seeking - Willing to carry certain risks.

Question 18

Define ‘Risk’

Answer 18

Possibility of something unfortunate happening.

Question 19

What does Homogenous Exposure mean?

Answer 19

When a risk has similar past risks to be compared to.

Question 20

What influences someone to buy insurance?

Answer 20

Risk Attitude
Price willing to pay for peace of mind
Extent they feel they have a choice

Question 21

What are the types of Compulsory Insurance?

Answer 21

Employers’ Liability
Motor
Public Liability
Dangerous Animal/Dog
Professional Indemnity

Question 22

Employers’ Liability

Answer 22

Insures employers against liability to cover employees bodily injury or disease sustained due to employment. 5m liability cover minimum.

Question 23

What organisations need PI insurance?

Answer 23

Solicitors & Insurance Intermediaries

Question 24

What sets out the standards expected from Insurance professionals?

Answer 24

FAC Consumer Duty

Question 25

What is the best definition of Insurance being a ‘Risk Transfer Mechanism’ ?

Answer 25

Moving the financial impact of a loss to insurers.

Question 26

Main purpose of Risk Management

Answer 26

Reduces potential for losses
Shareholder Confidence
Disciplined approach to quantifying risk.