IF1 - Module 1 and 2 Flashcards
What the two bodies responsible for regulating the insurance industry in the UK?
- The Prudential Regulation Authority (PRA)
- The Financial Conduct Authority (FCA)
What are the three key steps in the risk management process?
Risk identification
Risk analysis
Risk control (including the possibility of risk transfer).
What is physical hazard?
Physical hazard relates to the physical characteristics of the risk and includes any measurable dimension of the risk.
What is moral hazard?
Moral hazard is the lack of incentive to guard against risk where one is protected from its consequences, e.g., by insurance.
What are the 3 types of risk that need to be present for a risk to be insurable?
In general for a risk to be insurable it has to be:
A financial risk - This means the consequence of the adverse event must be measurable in financial terms.
A pure risk - This means that there is the possibility of a loss but not of gain, and where the best that we can achieve is a break-even situation. Travelling home in a car is a good example. The best that we can hope for is a safe arrival. The possibility exists however, that there might be an accident and the car damaged or someone injured.
A particular risk - This means that the risk is localised or even personal in their cause and effect. Sometimes the cause may be more widespread (e.g. a storm over a whole region), but the effect is localised or even related to an individual.
What is the EU Gender Directive and when and how did it come into place?
The EU Gender Directive came into place in 2011 after a legal assertion by a Belgian consumer group called Test-Achats.
The ruling states that insurers can no longer use gender as a premium calculation tool or in determining which benefits can be offered.
The directive was transposed into UK law by the Equality Act 2010 Regulations 2012.
A small fixed sum to be paid by the policy holder in the event of a claim is known as?
The excess
A large fixed sum to be paid by the policyholder in the event of a claim is known as?
The deductible
What is the difference between personal lines insurance and commercial lines insurance?
Personal lines insurance protects a policyholder from loss/damage to personal property or from damages for which the policyholder may be held personally responsible.
Where as commercial lines insurance protects a business from loss of its business property or damages for which the company may be held liable.
What is employers’ liability insurance?
Employers’ liability insurance protects businesses against legal and compensation expenses arising from employee claims. It is an important type of insurance, because if an employee falls ill or sustains an injury through there work, the business could be held liable. Like motor insurance, this is compulsory by law.
What is public liability insurance?
Public liability insurance is a type of business insurance that covers the cost of compensation and legal fees a business may be required to pay if a member of public is harmed or their property is damaged because of their business activities.
What is product liability insurance?
Product liability insurance protects a business against the cost of compensation and legal fees should property damage or a personal injury be caused by a faulty product that a business sells.
What is directors’ and officers’ liability insurance?
Directors and officers have specific duties, responsibilities and powers relating to their positions. If a director or officer of your company is found to have acted outside of their terms of reference, civil, criminal or regulatory proceedings can be brought against them.
Directors’ and officers’ liability insurance covers the cost of defending these proceedings, as well as any compensation costs that arise from an unsuccessful defence.
What is professional indemnity insurance?
Professional Indemnity Insurance (PI) is insurance that protects professionals from claims alleging that they made mistakes or were negligent in the their work. It covers compensation claims and legal fees. PI is often a requirement for certain regulated professions, such as solicitors.
What is a peril and what is a hazard
A peril is defined as what gives rise to a loss. Where as a hazard can be defined as something which influences the operation or effect of the peril.
For example, smoking a cigarette in a house insured against fire would be a hazard that could start a fire, whilst the actual fire would be the peril.
In order for a risk to be insurable, what must be present?
The event insured against must be fortuitous - This means the event must be accidental or unexpected. In contrast, an example of a non-fortuitous event would be if a policyholder damaged their own car.
There must be insurable interest - This means there is a legally recognised financial relationship between the insured and the object or liability that is being insured. For example, you can insure against the theft of your own car because you suffer the financial loss if it is stolen.
Also, insuring the risk must not be against public policy
It is commonly recognised in law that contracts must not be against public policy or go against what society considers to be the right or moral thing to do. Insurers should not, therefore, cover risks that are against public policy.
What is the relevance of homogeneous exposures in insurance?
Given a sufficient number of exposures to similar risks, known as homogeneous exposures, the insurer can forecast the expected frequency and likely extent of losses.
This is achieved by using the law of large numbers, a theory that determines that predictions become more accurate as the base of data used increases in size. In the absence of a large number of homogeneous exposures, the task is more difficult, as patterns and trends are more difficult to determine.
What are the benefits of insurance?
For a business:
Improved cash flow - money does not have to be kept in reserve for potential losses, which frees up capital and therefore improves cash flow
Expansion of business – enterprise is encouraged, since insurance makes it easier for new businesses to start or for existing businesses to invest, innovate and expand
For society:
Social benefits – such as encouraging business activity and helping to keep people in employment. Most commercial insurance policies will offer a business interruption element which covers wages and the loss of trading income during a period of business interruption and recovery
Loss control – is improved. Insurers have an interest in reducing the frequency and severity of losses, not only to enhance their own profitability but also to contribute to a general reduction in the economic waste which follows a loss. Also, the policyholder suffers less business interruption and consequential inconvenience as the effects of the loss are minimised or ideally, do not occur at all
What is self-insurance?
The term self-insurance means that an individual or company has decided not to use insurance as the risk transfer mechanism, but to carry the risk themselves.
What is co-insurance?
Co-insurance is a way for insurers to share risk with others.
It is used in two distinct ways in the insurance market:
- risk sharing between insurers
- risk sharing with insured
How does risk sharing with insurers work?
In this context, co-insurance is a risk-sharing mechanism which applies mainly, but not exclusively, in the London Market (including Lloyd’s).
For property insurance in particular, an insurer may agree the terms to be applied with other insurers (‘co-insurers’) and issue a collective policy. Each insurer receives a stated proportion of the premium and pays the same proportion of any losses that occur. The ‘lead office’ is the first named insurer in the policy and carries the largest share of the risk, they are also responsible for issuing the documentation.
Each time a change is required the leading office issues closing instructions to each of the co-insurers, advising them of the proposed change and requesting their agreement.
Although the lead office carries out these functions on behalf of the other insurers, each insurer is separately liable to the insured for their proportion of any claim that becomes payable. The policyholder has a direct contractual relationship with each individual co-insurer. It is as if each had issued a policy for its own share.
In the event of a claim, the lead office will settle losses, within agreed defined limits, on behalf of the co-insurers and recoup the sums from them afterwards although for substantial losses, say in excess of £50,000, a payment is made to the policyholder by each co-insurer and sent to the leading office for onward transmission to them.
How does risk sharing with the insured work?
The term ‘co-insurance’ is also used in relation to the amount of a risk that the insured may retain.
A small, fixed sum to be paid by the insured is called an ‘excess’; a large, fixed sum tends to be called a ‘deductible’.
However, where an insured is responsible for a substantial proportion of each loss, either through choice (in order to reduce premiums) or by necessity (as part of an insurer’s terms for accepting the risk), the term co-insurance is used.
One benefit of risk sharing for insurers is that the policyholder is deterred from making small claims. They may also take more care to prevent damage or loss occurring if they are likely to be financially impacted.
What are the five main parties in the insurance market?
- Buyers (Policyholders)
- Sellers (Insurers)
- Intermediaries (the middle men)
- Comparison websites (Aggregators)
- Reinsurers (A way to spread risks)
What are the five type of insurers?
- Proprietary companies
- Mutual companies
- Captive companies
- Protected cell companies
- Lloyd’s.
Detective controls are
Designed to spot errors or irregularities and detect when an adverse event has occurred.
Corrective controls are
Designed to right errors or irregularities that have been spotted
