IF1 Study Book Key Points Chapter 1

Question 1

Overview of Risk and Risk Trasfer :-
Risk has an element of what ?

Answer 1

Uncertainty, Unpredictability and sometimes danger.

Question 2

Overview of Risk and Risk Trasfer :-

Answer 2

The term risk is used in a number of ways in the insurance market and can mean the peril or contingency that is insured, the thing ( or liability )actually insured or both the thing insured and the range of contingencies or scope of cover required.

Question 3

Overview of Risk and Risk Trasfer :-

Answer 3

Individuals can either be risk seeing or risk averse.

Question 4

Overview of Risk and Risk Trasfer :-

Answer 4

The primary function of insurance is to act as a risk transfer mechanism; that is to transfer a risk from one person, the insured to another the insurer. The insured exchanges a large unknown financial risk for a much smaller certain premium.

Question 5

Overview of Risk Management:-

Answer 5

The primary function of insurance is to act as a risk transfer mechanism, that is to transfer a risk from one person, the policy holder, to another, the insurer. The policy holder exchanges a large unknown financial risk for a much smaller certain premium.

Question 6

Overview of Risk Management:-

Answer 6

Risk management seeks to identify, analyse and control risk.

Question 7

Overview of Risk Management:-

Answer 7

Risks can be controlled by physical means (taking measures to decrease the likelihood of a feared event happening) or by financial means (transferring the risk to another by insurance or by contract). They can be controlled by improving risk awareness through cultural behaviour and training.

Question 8

Overview of components of risk:-

Answer 8

The insurer will consider the frequency with which a risk occurs, and the severity of its impact when it does, when deciding how much of a risk can be prudently accepted.

Question 9

Overview of components of risk:-

Answer 9

A Peril is that which gives rise to a loss and a hazard is that which influences the operation or effect of the peril.
Hazard can be physical or Moral.

Question 10

Overview of features of insurable risks:-

Answer 10

In order to be insurable, risks must be financial (ie their impact to be capable of financial measurement), Pure (ie not speculative) and Particular (ie localised and personal in their impact).

Question 11

Overview of features of insurable risks:-

Answer 11

An event natured against must be fortuitous or unforeseen, there must be insurable interest and insuring against it must not be against public policy. Generally, too, there must be homogeneous exposures.

Question 12

Overview of pooling of risks:-

Answer 12

Pooling of risk is the principle that the losses of a few are paid for by the premiums of the many.

Question 13

Overview of pooling of risks:-

Answer 13

The law of large numbers = where there are large numbers of risks covered, the actual number of losses occurring tends to be very close to what was expected.

Question 14

Overview of pooling of risks:-

Answer 14

Each person contributing to the pool must pay a fair premium based on the amount of risk they bring.

Question 15

Overview of benefits of insurance.

Answer 15

Insurance brings peace of mind for the policy holder and a number of economic benefits for both businesses and society at large.

Question 16

Overview of risk sharing:-

Answer 16

An insurer can deal with a risk that is too large through either co-insurance or reinsurance.

Question 17

Key points chapter 1

Answer 17

• co-insurance often describes where the carry of a risk is shared between two or more insurers.
• it can also refer to the case where the insured agrees to retain part of the risk themselves.
• Dual insurance is the existence of two or more policies covering the same risk.
• Self-insurance is where the policy holder decides to carry the risk themselves by setting aside funding.