1. Fundamental Principles in Insurance (Risk & Insurance) Flashcards
What are the primary functions of insurance?
Spreading Risk
Providing Certainty
Transferring Risk
What are the secondary functions of insurance?
Do not have to set aside large sums of money
Expand business
Job protection
Loss reduction
Insurers invest in funds
Invisible Exports
What are ‘invisible exports’
Services are sold and exported overseas (Risks overseas are insured in London)
What is the basic concept of insurance?
Contributions of the many, cover the losses of a few
What is Pooling of Risk?
Insurance company takes premiums from all those with risks and pays for losses from this
How is a premium determined?
The premium is proportionate to the risk brought to the pool.
What is the Law of Large Numbers?
Large number of similar situations provides more accuracy over the actual number of an event (E.g exact number of loss)
What are the features of an Insurable Risk?
Fortuitous Event
Insurable Interest
Not against Public Policy
+ Homogenous Exposure (Not one-off)
What are the categories of Risk?
Financial / Non-Financial
Pure / Speculative
Particular / Fundamental
What makes a Risk insurable?
Financial - Measurable.
Pure - Not based on gain.
Particular - Local in the effect.
What are the components of a Risk?
Uncertainty
Level of Risk
Peril / Hazard
Difference between Peril and Hazard
Peril - The cause
Hazard - The environment which gives rise to Peril
Types of Hazards?
Physical - Physical, measurable characteristics of risk
Moral - Attitude or behaviour of people (Not measurable)
Definition of Risk Management?
Identification, analysis and economic control of those risks which can threaten the assets or earning capacity of an enterprise
Definition of Risk Identification?
Examination of activities of organisation in order to ascertain features which may provide hazardous to furthering its objective
Definition of Risk Analysis?
Looking at past data to determine what actions to take on current risks.
What are the two attitudes to risk?
Risk Averse - Look to minimise risk where possible.
Risk Seeking - Willing to carry certain risks.
Define ‘Risk’
Possibility of something unfortunate happening.
What does Homogenous Exposure mean?
When a risk has similar past risks to be compared to.
What influences someone to buy insurance?
Risk Attitude
Price willing to pay for peace of mind
Extent they feel they have a choice
What are the types of Compulsory Insurance?
Employers’ Liability
Motor
Public Liability
Dangerous Animal/Dog
Professional Indemnity
Employers’ Liability
Insures employers against liability to cover employees bodily injury or disease sustained due to employment. 5m liability cover minimum.
What organisations need PI insurance?
Solicitors & Insurance Intermediaries
What sets out the standards expected from Insurance professionals?
FAC Consumer Duty
What is the best definition of Insurance being a ‘Risk Transfer Mechanism’ ?
Moving the financial impact of a loss to insurers.
Main purpose of Risk Management
Reduces potential for losses
Shareholder Confidence
Disciplined approach to quantifying risk.
