IF1 -Chapter 1

Question 1

Risk Management

Answer 1

attempting to deal with risks we face - How much will it cost if things go wrong. What are the changes of the risk becoming a reality? - the identification, analysis, and economic control of those risks which can threaten the assets or earning capacity of an enterprise

Question 2

Risk (General)

Answer 2

Possibility of an unfortunate occurrence, possibility of oss, chance of gain

Question 3

Insurance

Answer 3

Transferring of risk

Question 4

Risk (three ways in market place)

Answer 4

1. Peril or contingency that is insured - fire, theft, etc… 2. Liability - Could be a factory or manufacturer’s liability to the public 3. Underwriter defining risk - wide definition encompassing property/thing and range of contingencies or scope of cover

Question 5

Attitude to Risk

Answer 5

Risk seeking, Risk averse

Question 6

Risk Management (Why is it important?)

Answer 6

1. Reduces potential loss by identifying and managing hazards 2. Gives shareholders greater degree of confidence that the company is managing its risks. Stock market companies - legal requirement to identify all significant risks to which it is expose and explain this in the annual report and also how it is managed. 3. Disciplined approach to quantifying risk

Question 7

Individuals (risk management)

Answer 7

Different approach to companies - usually do it because compulsory (car/mortgage, etc..) - Even when there is a choice, unlikely to use scientific methods - decided by risk attitude - If they have a lot of assets, then may take more formalized approach - “High net worth individuals”

Question 8

Risk Management (Process)

Answer 8

Should be a continuous and developing process embedded in firm’s strategy - Risk identification –> Risk Analysis –> Risk Control

Question 9

Risk Identification

Answer 9

Discovering the threats to it that may already exist and the potential threats that may exist in the future. Not all may be insurable but must be managed. i.e. petty theft cannot be insured, but can be managed by setting aside funds to cover cost - Can also bring in an insurer to identify risks with reports/surveys

Question 10

Risk Analysis

Answer 10

examine past data to evaluate or analyse risk - past loss pattern to predict what is likely to happen with individuals/property in this category - look at many of the same elements when considering rating of risk

Question 11

Risk Control

Answer 11

Reduce or eliminate risk - Elimination most effective but maybe costly or impracticable (outsourze activity) - Look at whether the cost of doing so (eliminating risk) is reasonable compared to cost of feared event

Question 12

Risk Control (2 distinct aspects)

Answer 12

1. Physical control measures - (locks, antitheft) 2. Financial control - transferring risk

Question 13

How Insurers or other similar bodies help control risk

Answer 13

1. Imposing requirements/making recommendations to improve risk 2. Survey/report 3. Offer premium reduction as incentive for risk improvements

Question 14

Loss Prevention Council (LPC), Fire Protection Association (FPA) and other similar bodies

Answer 14

Help by 1. researching new materials and methods of construction 2. Providing rules that set standards 3. Report on new industrial process and machinery 4. provide rules for construction/ilnstallation

Question 15

Categories of Risk

Answer 15

1. Financial and Non-Financial 2. Pure and Speculative 3. Particular and Fundamental

Question 16

Non-Financial Risk

Answer 16

Cannot be measured in financial terms - May have a financial aspect incidentally - Real risk arises from decisions and actions motivated by other considerations - i.e. family heirloom - may have sentimental value but can only be insured for its intrinsic value

Question 17

Financial Risk

Answer 17

Can be measured in financial terms - usually compensatory - usually value placed on loss is not determined in advance with a few exceptions such as personal accident/sickness/life (Known as benefit policies)

Question 18

Pure Risk

Answer 18

Can be insured - Where there is a possibility of a loss but not of gain - i.e. traveling home in your car - best case scenario is to make it safely (break even)

Question 19

Speculative Risk

Answer 19

Not insurable - gambling, investments, starting a new business, etc..

Question 20

Fundamental Risk

Answer 20

Usually not insured because risk occurs on too vast a scale - earthquake - in a earthquake prone area, or war, or economic recession - (usually social, economic, political or natural causes) - Different from speculative risk (won’t insure on principle), but here it is a lack of willingness or capacity on part of insurers (although it is sometimes insured)

Question 21

Particular Risk

Answer 21

Localized or even personal in cause and effect - cause may be widespread (storm) but effect is localized or even related to an individual

Question 22

Features of risk that can be insured

Answer 22

1. Event must be unforeseen 2. Must be insurable interest 3. Must not be against public policy

Question 23

Insurable interest (Features of risk that can be insured)

Answer 23

legally recognized financial relationship between the insured and the object or liability

Question 24

Public Policy (Features of risk that can be insured)

Answer 24

Cannot be against the law or what society considers the right or moral thing - encourage people to break the law

Question 25

Homogenous Exposures

Answer 25

Sufficient number of exposures to similar risks, historical patterns and trends - may not always be available (if not, then it is a subjective risk). Objective is when you have all the data. The greater the number of similar risks to insure, the closer the actual outcome will be to what was expected in terms of losses

Question 26

Components of risk

Answer 26

1. Uncertainty, 2. level of risk, 3. peril and hazard

Question 27

Uncertainty (component of risk)

Answer 27

Pretty self explanatory - Not knowing that the event will happen

Question 28

Level of Risk

Answer 28

determined by frequency and severity (measurement criteria used in risk management process)

Question 29

Frequency and Severity

Answer 29

Example - House close to the bank that is prone to overflowing and flooding or a house 100 meters away from the bank - Severity - maybe the level of risk is now different if the house by the bank cost 90K but the one 100 meters away cost 250K

Question 30

High frequency and low severity

Answer 30

Generally you get a bell curve shape leaning to the left - Look at page 9 of Chapter 1 - Common relationship for property damage and industrial injury incidents

Question 31

Heinrich Triangle

Answer 31

For every 1 major injury, there were 30 minor ones, and 300 non injury incidents

Question 32

Low Frequency and High Severity

Answer 32

Example - aircraft accident

Question 33

Significance of frequency and severity (What insurers want ideally)

Answer 33

Smooth trends in trading patterns - no peaks and troughs in claims from one year to next

Question 34

Peril and Hazard (aspect of risk)

Answer 34

Causes of loss - Peril is that which gives rise to a loss - Hazard - that which influences the operation or effect of the peril - example fire and a cottage thatched roof - Fire is the peril - the thatched roof is the hazard

Question 35

Hazard (physical and moral)

Answer 35

Physical - relates to a physical characteristic of a risk (i.e. fancy sports car - can go faster and more likely to be stolen) 2. Moral Hazard - arises from attitude and behavior of people - usually the conduct of person insured but can be that of the insured’s employees - carelessness, dishonesty (fraudulent claims) (can sometimes be measured with record like motor but not always)

Question 36

Pooling of Risks

Answer 36

Contributions of many to cover losses of few - pool should be big enough to cover the cost of claims, administration, and a bit of profit for insurer

Question 37

Law of large numbers

Answer 37

When you have a large number, the statistic will tend to go towards the expected

Question 38

Equitable Premium

Answer 38

Fair premium base on operating a successful pooling system - what is fair for that pool. different pools

Question 39

Benefits of insurance (6)

Answer 39

1. releases capital for companies - no need o set up funds for fires, floods, etc… 2. Enterprises encouraged to start or expand for smaller companies 3. Employees are kept in work 4. Losses reduce in size and number - Overall cost to community of all damage by fire is “fire waste”5. Nation benefits from investments made by insurers - creates premium reserve (time delay between receipt of premiums and occurrence of claims) - Claims reserve - once claims occur and time they are paid. reserves of money to invest 6. Nation benefits from invisible exports - sums of money representing trading activitues of insurers based in the UK that are operated in other areas.

Question 40

Risk Sharing

Answer 40

If sum insured is higher than the acceptance limits they may share this risk

Question 41

Coinsurance

Answer 41

Maybe with another insurer with pre-agreed risks and premiums paid but for administration purposes leading insurer may pay the small claims and get the sums back from the other. If bigger, ten they may split it.

Or risk sharing with the insured -Excess/Deductible (tend to be larger)

Question 42

Dual Insurance,

Answer 42

Duplicated coverage for same thing - sometimes done deliberately sometimes accidentally

Question 43

Self- Insurance

Answer 43

Set aside funds for this - amount set aside is called retention

Question 44

Classes of insurance

Answer 44

Property, Pecuniary, Motor, Liability, Marine/Aviation, Combined, Health

Question 45

Property Insurance

Answer 45

Fire, special perils, theft, engineering/breakdown, Glass, livestock, money

Question 46

Pecuniary Insurance

Answer 46

Fidelity (dishonest employees or partners), legal expenses, credit (covers sellers against risk of non-payment), Business interruption

Question 47

Liability Insurance

Answer 47

Employers, public, products, directors, professional

Question 48

Marine Insurance

Answer 48

hull, cargo, freight

Question 49

Health Insurance

Answer 49

Personal Accident, sickness, private medical, payment protection indemnity, critical illness