IF1- Chapter 1 Flashcards
Risk Transfer
PH pays premium to insurer in return for insurer accepting unknown cost of the risk
Definitions of risk:
Doubt concerning outcome of a situation
Unpredicitability of loss and chance of gain
Risk transfer mechanism
Acceptance of unknown risk for an agreed premuim
Other meanings to ‘risk’ and example
peril/contingency- EG underwriter quoting for the risk and the range of scope required
What are those who carry the risk themselves
Risk seeking
Those who minimise the risk
Risk averse
what organisation sets standards for risk managemetn
Airmic
what is risk control
elimination of reduction of risk
What are the different levels of risk control
Physical control- locks on doors
Financial control- transferring risk by taking out insurance
Developing risk culture- training employees in risk management
Elements of control
Detective controls- detects errors or irregularities
Corrective controls- corrects errors or irregularities
Preventative controls- keeps errors or irregularities from occuring
Components of risk
uncertainty, level of risk, perils and hazards
how is the level of risk asessed- example
frequency and severity
high frequency and low severity- motor insurance
Low frequency and high severity- oil spillages
what is a peril and hazard
that which gives rise to loss
what is a hazard
that which influences the operation or effect of peril- EG smoking cigs in a house
What are physical hazards
physical hazards relate to physical characterstics of the risk and include measureable demensions of the risk
what are moral hazards
arise from attitude and behaviour of people= careless, dishonesty etc
categories of risk
financial and non financial
Pure and speculative
Particular and fundamental
definition of financial risk
for a risk to be insurable the outcome must be measured in financial terms
non -financial risks
aren’t capable of financial measurement, but it is incidental- risks arising from decisions motivated by other considerations- EG family heirloom
pure risk
possibility of a loss but not of gain- best can be achieved is break even- these risks are insurable
speculative risks
loss, break even or gain
Insurers don’t insure as they are undertaken voluntarily EG gambling, stock market, national lottery
particular risks
localised or personal in their effect- loss is localised or related to an individual
Fundamental risks
rise from cause outside control of individuals or groups and effects are widespread- often catastrophic
features of insurable risks
the event must be fortituous
insurable interest
insuring the risk must not be against public policy
what is a fortituous event
accidental or unexpected
non fortituous risk
PH who deliberately damages their vechile for instance
insurable interest
legaly recognised financial relationship between insured and the object they are insuring
Against public policy
can’t be insured- EG attempting to insure against risk of a fine
homogenous exposure
using data from various risks to allow insurers to predict expected frequency and likely extent of losses
pooling risks
losses of the few are met by the contributions of the many
law of large numbers
enables ensurer to predict the final cost of claims in a year
equitable premuims
fair contributions to shared pool- responsibility of the underwriter
EU gender directive 2011
gender can no longer be used as premuim calculator
co-insurance
sharing risk between insurers and risk sharing with the insured
risk sharing mechanism
reinsurance
insurers come together to form common pool and jointly underwrite particular risks- often catastrophies, terrorism etc
benefits of co-insurance
PH deterred from making small claims
dual insurance
2 or more policies that cover the same risk- eg travel policy overlaps with home
self insurance
individuals or companies carrying the risk themselves- sum will be set aside to fund losses
Benefits of buying insurance
improved cash flow
expansion of business
loss control
premuims invested
social benefits
