IF1.1 (Risk & Insurance) Flashcards
Define Risk Averse
prefer to minimise the risks they’re exposes to
Define Risk Seeking
willing to carry certain risks themselves
Define Risk
The possibility of an unpredictable happening and the related uncertainty of the outcome of the situation. Can be be a possibility of loss or a chance of gain.
Insurance acts as a _ _ _
Risk transfer mechanism
Name the 3 stages of risk management
- Identification
- Analysis
- Control
Describe risk identification (risk management) and give an example
discovering current and potential risk e.g. risk of robbery
Describe risk analysis (risk management) and give an example
Using past data to assess the level of risk (e.g. spotting trends, how severe are risks etc)
e.g., young driver may be higher risk as data shows they’re more likely to get into an accident due to lack of experience.
Describe risk control (risk management) and give an example
Reduce or eliminate risk where possible e.g. put window locks & making people aware of the risks
What is Association of Insurance and Risk Managers in Industry and Commerce (AIRMIC)?
organisation sets standards in areas of risk management
Why is Commercial risk management important?
- reduces the potential loss by identifying and managing hazards
- gives shareholders a greater degree of confidence in a companies ability to manage its risks
- provides a disciplined approach to quantifying risks.
what are the three aspects to consider for controlling a risk?
- Physical control measures
- Financial Control Measures
- Developing a Good risk culture
example of a physical control measure
putting specific locks on doors to reduce the theft risk
example of a financial control measure
Taking out insurance
What is developing a good risk culture
Improving risk awareness and managing risk. Achieved by educating employees or clients on how to avoid and reduce risks.
Internal controls: Detective
detect errors or irregularities that may have occured
Internal Controls: Corrective
correct errors or irregularities that have been detected
Internal Controls: Preventative
Keep errors or irregularities from occuring.
What does the loss prevention council (LPC) do?
develop risk management solutions
What does the Motor Insurance Anti-Fraud and Theft Register (MIAFTR) do?
records all details of vehicles and motorcycles that become total losses. If the claimant or claimant address matches existing data the insurers are advises so they can check for fraud.
What does the Fire Protection Association (FPA) do?
- research new materials and methods of construction to see how to behave in a fire.
- provide rules that set standards for construction.
- reporting on new industrial processes and machinery.
- provides rules for the construction, installation and operation of fire extinguishing appliances.
What does Thatcham Research Centre do?
tests vehicle safety and security systems.
Whats does ABI stand for
Association of British Insurers
What are the three components of risk
- uncertainty
- level of risk
- peril & hazard
What is the level of risk assessed by?
frequency & severity
Example of high frequency low severity risk
motor risks e.g. cracked windscreens
Examples of low frequency high severity risks
Aircraft accidents & Marine Accidents e.g. oil spillages
Risk appetite
how much risk a company is willing to accept on factors relating to frequency and severity.
Define peril
the cause of a loss
Define Hazard
something that influences the operation of the peril
(can be positive or negative)
example of a peril
fire
example of a hazard
Smoking in the house, having a thatched roof,…
Define physical hazard
the physical characteristics of the risk
example of a physical hazard
(positive) security protection installed
(negative) Low standard of construction
Define moral hazard
a moral hazard arises from the attitude and behaviour of people.
example of a moral hazard.
(positive) drivers who take a lot of care while driving. A factory that provides a lot of safety training.
(negative) a person who has previously made fraudulent claims.
Why are hazards important for an underwriter?
they need to understand what influences the liklihood of a peril when writing the contract.
How do insurers ‘fix’ moral hazards?
there are conditions which must be met in a claim. e.g. have evidence of a forcible entry (checks if the person has lied about locking their doors)
Categories of risk
- financial/non-financial
- Pure/speculative
- particular/fundamental
Financial Risks =>
Non Financial Risks =>
Financial Risks => Insurable
Non Financial Risks => Not Insurable
Example of a financial risk
A car, it has a simple market value
Example of a non-financial risk
Anything with sentimental value (the market value can be insured but nothing over that)
Define Idemnity
security or protection which cannot be benefitted from (e.g. against a loss or a break-even situation)
Define a Pure Risk
A risk that involves a possible loss or breaking even.
Define a speculative risk
a risk that involves a possible loss, gain or breaking-even.
Pure risk =>
Speculative risk =>
Pure risk => Insurable
Speculative risk => Not-insurable
Define Particular risk
risks that are localised or personal in their cause and effect.
Define Fundamental risk
risks from a cause outside of the control of any one individual or group of individuals and their effects are usually widespread
examples of fundamental risks
war, economic reccession, earthquakes & famine
Fundamental risks may have particular consequences…
for individuals which can be insured.
Particular risk =>
Fundamental risk =>
Particular risk => insurable
Fundamental risk => not insurable
3 features for a risk to be insurable
financial, pure, particular
Criteria for a risk to be insurable (4)
- fortuitous
- insurable interest
- no conflict with public policy
(4.) homogenous exposures
Define fortuitous
an unforeseen event.
an example of not being foruitous…
buying insurance after an accident occurs to then claim it on the insurance.
Define Insurable Interest
legally recognised financial relationship between the insured and the object or liability that is being insured.
Describe ‘not against public policy’ (insurable risks)
contracts must not be against public policy or go agaisnt what society considers to be the right or moral thing to do.
Example of being against public policy
something which is against the law. e.g. speeding.
define homogenous exposure
Given a sufficient number of exposures to similar risks the insurer can forecast the expected frequency and likely extent of losses.
Reasons people buy insurance
- peace of mind
- legal requirement
- contractual obligation
What are the benefits of insurance
- improved cash flow (money doesn’t have to be kept in reserve)
- easier expansion of business
- Loss control (policyholders suffer less business interruption, reduced frequency and severity of losses due to conditions)
- Policyholders premiums are invested.
- Social Benefits (encouraging business activity and keeping people in employment)
Discriminating factors are used to…
calculate how much risk an individual represents
The losses of the few are…
met by the contributions of the many
Define Pool
the collection of premium funds that will be used to pay for the claims.
The law of large numbers enables…
the insurer to predict the final cost of claims.
Why is it important to predict the final cost of claims?
So that insurers can charge a fair premium (to cover all claims costs, operational costs and provide some kind of profit)
define Equitable premiums
a fair contribution so ensure there is enough money in the pool & to cover operational costs.
What does the EU Gender directive mean?
insurers can no longer use gender as a premium calculation
2 definitions of co-insurance
- multiple insurers insure parts of the same thing
- when the insured agrees to pay a percentage of each claim on the policy
Define dual insurance
where there are 2 or more policies covering the same risk (usually by accident)
Define self insurance
where the company or individual has decided against transferring the risk via insurance in favour of funding it themselves.
Define re-insurance
When insurers come together to form a pool and agree to jointly underwrite particular risks. Usually designed to cover catastrophic risks such as terrorism or earthquakes.
What is the lead office (co-insurance)
The first named insurer in the policy and normally the one who carries the largest share of the risk.
2 types of excess
compulsory (chosen by the insurer)`
voluntary (chosen by the insured to bring the premium down)
Define duductible
large fixed sum like an excess (in large commercial insurances)
Define Attitude to risk
how much risk an individual is willing to take e.g. risk adverse or risk seeking.
Define law of large numbers
A theory that determines that predictions become more accurate as the base of data used increases in size.
preventative control measures vs physical control measures
physical - making sure you have one
preventative - make sure your doing something
risk retention
The amount of risk a company or individual is willing to keep themselves i.e. not insure
What is the purpose of IPT?`
to raise revenue for the government
Is the premium likely to be effected when purchasing directly from an insurer?
yes (less costs for commissions, or sometimes more costs for marketing)
