Introduction to insurance part. 1

Question 1

List 5 Risk Management Processes:

Answer 1

Risk Management Processes:
1. Establishing the context
2. Risk identification
3. Risk assessment
4. Risk response
5. Risk monitoring and review

Question 2

explain the first 3 steps to risk management

Answer 2

A. Establishing the context:
1 Risk identification:
1. Identification of risks through various methods such as brainstorming, checklists, and historical data analysis.

C. Risk assessment:
1. Assessment of risks as to their potential severity of loss and probability of occurrence.
2. Making educated guesses to prioritize implementation of risk management plan.

D. Risk response:
1. Developing strategies to manage or mitigate identified risks.
2. Implementing chosen strategies.

Question 3

explain the last step to risk management

Answer 3

E. Risk monitoring and review:
1. Continual monitoring and review of implemented strategies.
2. Adjusting strategies as necessary based on changes in context or new risks that emerge.

Question 4

Methods that can be used in the risk identification process. explain 3

Answer 4

Physical inspections / on-site inspection involves physically examining a location or asset to identify potential risks or hazards.

Statistical Analysis of past losses involves analyzing historical data to identify patterns and trends in losses or incidents that can help predict future risks.

HAZOPS (Hazard and Operability Study) is a structured method for identifying potential hazards and operability problems in industrial processes. It involves a systematic review of each element of a process to identify potential deviations from design intent that could lead to hazardous conditions.

These methods can be used in conjunction with other risk identification methods such as brainstorming, checklists, and expert judgment to comprehensively identify potential risks.

Question 5

explain loss minimisation in the context of retention

Answer 5

Loss minimization in the context of retention refers to the process of minimizing the financial impact of a loss that has been retained by an organization.

Question 6

explain retention in the context of loss minimisation

Answer 6

Retention involves accepting the loss when it occurs, and losses that occur can either be funded or unfunded in advance.

Question 7

explain on planned and unplanned retention

Answer 7

Planned retention involves a conscious and deliberate assumption of recognized risk, while unplanned retention occurs when there are no alternatives available. In both cases, post-loss and pre-loss arrangements can be made to minimize the financial impact of a loss.

Question 8

explain how Pre-loss arrangements can be used in loss minimisation

Answer 8

Pre-loss arrangements involve making arrangements before a loss occurs to ensure that funds are readily available to pay for losses that occur. This can include setting aside funds in a reserve account or purchasing insurance policies with high deductibles.

Question 9

explain how Post-loss arrangements can be used in loss minimisation

Answer 9

Post-loss arrangements involve making arrangements after a loss has occurred to minimize the financial impact of the loss. This can include negotiating with suppliers for extended payment terms, selling assets to raise cash, or borrowing money from lenders.

Question 10

explain funded retention in loss minimisation

Answer 10

Funded retention involves making pre-loss arrangements to ensure that money is readily available to pay for losses that occur. This can include setting up self-insurance programs or purchasing insurance policies with high deductibles.

Question 11

explain unfunded retention in loss minimisation

Answer 11

Unfunded retention involves accepting the loss without any pre-loss funding arrangements in place. This can be appropriate for small losses or risks that are unlikely to occur.

Overall, loss minimization in the context of retention involves making both pre-loss and post-loss arrangements to minimize the financial impact of retained risks.

Question 12

Loss Control/Reduction (mitigation) refers to

Answer 12

Loss Control/Reduction (mitigation) refers to the methods used to reduce the severity of a loss or the likelihood of a loss occurring.

Question 13

Explain the various types of loss control

Answer 13

There are various types of loss control measures, including separation, duplication, and timing of loss control.

Separation involves physically separating assets or processes to reduce the impact of a loss.

Duplication involves creating backups or redundancies to ensure that critical processes can continue in the event of a loss.

Timing of loss control involves implementing measures at specific times to reduce the likelihood or severity of a potential loss.

Question 14

The potential benefits of loss control include

Answer 14

The potential benefits of loss control include reducing the financial impact of losses, improving safety and security, and enhancing business continuity.

However, there are also potential costs associated with implementing loss control measures, such as increased expenses for equipment or personnel, reduced efficiency due to additional procedures or redundancies, and increased complexity in managing risks.

Question 15

an overall of loss control

Answer 15

Overall, Loss Control/Reduction (mitigation) is an important aspect of risk management that involves identifying potential risks and implementing measures to reduce their likelihood or severity. The choice of specific mitigation measures will depend on factors such as the nature and severity of risks involved, available resources, and organizational priorities.

Question 16

Transference

Answer 16

Transference is a risk management strategy that involves transferring the financial impact of a loss to another party. This can be done through outsourcing or insurance.

Question 17

Hold-harmless agreements are contracts

Answer 17

Hold-harmless agreements are contracts in which one party agrees to assume the liability for certain risks or losses that may occur. Incorporation involves creating a separate legal entity to assume the risks associated with a particular activity or asset. Insurance involves transferring the risk to an insurance company in exchange for payment of premiums.

Question 18

Enforcement of hold-harmless agreements can be challenging, because

Answer 18

Enforcement of hold-harmless agreements can be challenging, as they are not always legally enforceable. If the party assuming the liability is in a weaker bargaining position or lacks knowledge about the factual situation, courts may not uphold the agreement.

Question 19

Hedging

Answer 19

Hedging is another form of risk transfer that involves using financial instruments such as options and futures contracts to offset potential losses from adverse price movements in commodities, currencies, or other assets.

Question 20

Overall, Transference is an important aspect of risk management

Answer 20

Overall, Transference is an important aspect of risk management that involves transferring the financial impact of a loss to another party through outsourcing or insurance. The choice of specific transfer methods will depend on factors such as the nature and severity of risks involved, available resources, and organizational priorities.

Question 21

Discuss factors you need to consider when assessing retention as a potential risk management technique

Answer 21

Factors to consider in assessing retention as a potential risk management technique.

Question 22

Define Self-insurance

Answer 22

Self-insurance is a form of funded retention in which an organization assumes the financial risk of potential losses rather than transferring that risk to an insurance company.

In self-insurance, an organization sets aside funds to cover potential losses instead of purchasing insurance policies. These funds can be held in a reserve account or invested in other assets. If a loss occurs, the organization uses these funds to pay for the loss.

Question 23

Self-insurance can be appropriate for organizations that have?

Answer 23

Self-insurance can be appropriate for organizations that have sufficient financial resources and are able to accurately predict potential losses. It can also be used for risks that are difficult or expensive to insure through traditional insurance policies.

Question 24

what are the risks associated with self-insurance risks

Answer 24

However, self-insurance also carries certain risks. If losses exceed the amount set aside in the reserve account, the organization may face financial difficulties. Additionally, self-insured organizations may not have access to certain benefits provided by insurance companies, such as risk management expertise and claims handling services.

Question 25

Define Insurance

Answer 25

Insurance is a contract between two parties, whereby one party agrees to undertake the risk of another in exchange for consideration known as a premium. The party bearing the risk is known as the insurer or assurer, and the party whose risk is covered is known as the insured or assured.

Question 26

How insurance works by pooling

Answer 26

Insurance works by pooling risks from many individuals or organizations and using statistical analysis to determine the likelihood of losses occurring. The insurer then charges premiums based on this analysis, with higher premiums charged for higher-risk policies.

Question 27

How insurance works by pooling

Answer 27

Insurance works by pooling risks from many individuals or organizations and using statistical analysis to determine the likelihood of losses occurring. The insurer then charges premiums based on this analysis, with higher premiums charged for higher-risk policies.

Question 28

Benefits of insurance society

Answer 28

Benefits of insurance include financial protection against potential losses, peace of mind for individuals and organizations, and improved access to credit and other financial services. Insurance can also help to promote economic growth by reducing the impact of losses on businesses and individuals

Question 29

Costs of insurance to society

Answer 29

Costs of insurance to society include the expenses incurred by insurers for sales, servicing, administration, and investment management. The higher these expenses are, the less efficient insurers become. Additionally, the existence of insurance can encourage moral hazard, which is behavior that increases the likelihood of losses occurring. This behavior can cause premiums to be higher than they would be otherwise, represents a deadweight loss to society, can lead to disruptions in otherwise well-functioning markets, and truly is a societal cost of insurance.

Question 30

Indemnity is a concept related to insurance that

Answer 30

It refers to the act of providing financial compensation for a loss that the insured has suffered and putting them in the same position after the loss as they enjoyed immediately before it.

Question 31

The concept of indemnity implies that the object of insurance is to provide exact financial compensation for the insured. However, it also implies that the insured should not be

Answer 31

over-compensated and should not make a profit from their loss.

Question 32

The principle of indemnity is important in insurance because

Answer 32

The principle of indemnity is important in insurance because it helps to ensure that premiums are set at appropriate levels and that insurers are able to accurately assess risk. By providing exact financial compensation for losses, insurers are able to help individuals and organizations recover from unexpected events while also maintaining financial stability.

Question 33

Franchise

Answer 33

A franchise is a specified amount of loss that an insured party must bear before the insurer becomes liable for payment. Once the franchise has been exceeded, the loss is payable in full.

Question 34

How can franchises can be useful in certain situations where it is difficult or expensive to assess risk accurately?

Answer 34

By requiring insured parties to bear some of the risk themselves, insurers are able to reduce their exposure and provide coverage at lower premiums.

Question 35

Insurance Vs assurance

Answer 35

Insurance is a contract between two parties, whereby one party agrees to undertake the risk of another in exchange for consideration known as a premium. The party bearing the risk is known as the insurer or assurer, and the party whose risk is covered is known as the insured or assured. Insurance typically involves protection against specific risks, such as fire, theft, or accidents.

Assurance, on the other hand, is a type of insurance that provides protection against events that are certain to happen but whose timing is uncertain. For example, life assurance provides coverage against death, which is certain to happen but whose timing is uncertain. Assurance policies typically involve longer-term coverage and may also include investment components.

Question 36

indemnity vs non-indemnity

Answer 36

Indemnity refers to the act of providing financial compensation for a loss that the insured has suffered and putting them in the same position after the loss as they enjoyed immediately before it. The concept of indemnity implies that the object of insurance is to provide exact financial compensation for the insured, without over-compensating them or allowing them to profit from their loss.

Non-indemnity, on the other hand, refers to insurance policies that do not provide exact financial compensation for losses suffered by an insured party. Instead, non-indemnity policies may provide benefits or payments that are not directly tied to the actual value of the loss. For example, a health insurance policy may provide coverage for medical expenses up to a certain amount, regardless of the actual cost of treatment.

Overall, while indemnity involves providing exact financial compensation for losses suffered by an insured party, non-indemnity policies may provide benefits or payments that are not directly tied to the actual value of the loss. The choice between indemnity and non-indemnity policies depends on various factors such as risk assessment and cost-benefit analysis.

Question 37

Outline 7 principles of insurance

Answer 37

1. Utmost Good Faith: This principle requires both the insurer and the insured to act in good faith and disclose all relevant information related to the risk being insured. This helps to ensure that both parties have a clear understanding of the risks involved and can make informed decisions.
2. Insurable Interest: This principle requires that the insured party has an insurable interest in the subject matter of insurance. In other words, there must be a financial relationship between the insured and the subject matter of insurance recognized at law.
3. Indemnity: This principle requires that insurance policies provide exact financial compensation for losses suffered by an insured party, without over-compensating them or allowing them to profit from their loss.
4. Contribution: This principle applies when multiple insurers provide coverage for the same risk. In such cases, each insurer is responsible for contributing their share of any loss suffered by the insured party.
5. Subrogation: This principle allows insurers to take legal action against third parties who may be responsible for causing a loss covered by an insurance policy.
6. Proximate Cause: This principle requires that losses covered by an insurance policy must be caused by a covered peril or risk.
7. Mitigation: This principle requires that insured parties take reasonable steps to mitigate any losses they may suffer, in order to minimize their impact on insurers.

Overall, these principles help to ensure that insurance policies are fair, transparent, and effective in providing financial protection against potential losses while also maintaining financial stability for insurers

Question 38

distinguish between different types of life insurance

Answer 38

there are two main types of life insurance: term life insurance and cash-value life insurance.

Term life insurance provides coverage for a specific period of time, while cash-value life insurance provides both a death benefit and a savings component that accumulates over time.

Within cash-value life insurance, there are several variations such as whole life, universal life, and variable universal life.

Question 39

How does cash-value life insurance differ from term life insurance?

Answer 39

Cash-value life insurance and term life insurance are two different types of life insurance products.

Term life insurance provides coverage for a specific period of time, typically ranging from one to thirty years, and pays out a death benefit if the policyholder dies during the term.

Cash-value life insurance, on the other hand, provides both a death benefit and a savings component that accumulates over time.

The savings component can be invested in various ways, such as stocks or bonds, and can grow tax-deferred.
Cash-value life insurance policies are generally more expensive than term life policies because they provide both protection and savings components.

Question 40

What is the actuarial basis of life insurance and why is it important?

Answer 40

The actuarial basis of life insurance is the mathematical and statistical analysis used to determine the premiums, benefits, and other features of life insurance policies.

Actuaries use complex models to estimate the likelihood of death, disability, or other events that could trigger a payout from an insurance policy.

This information is used to set premiums that are sufficient to cover the expected payouts and administrative costs of the insurer while also generating a profit.

The actuarial basis of life insurance is important because it ensures that insurers can provide coverage at a reasonable cost while also remaining financially stable.

Question 41

what is proportional insurance

Answer 41

Proportional insurance is a type of insurance in which the insurer agrees to cover a portion of the loss in exchange for a premium that is proportional to the value of the policy. In other words, the amount of coverage provided by the insurer is proportional to the amount of insurance purchased by the policyholder.

This type of insurance is commonly used for property insurance, such as fire and theft insurance, where the insurer agrees to cover a percentage of the value of the property in the event of a loss. Proportional insurance can also be used in reinsurance, where the reinsurer agrees to cover a proportion of the losses of the primary insurer, based on a pre-determined percentage.

Question 42

who is a cedant

Answer 42

In the insurance industry, a cedant is a company that transfers risk to a reinsurer. This means that the cedant purchases reinsurance from another company to protect itself against losses from large claims or catastrophic events. The reinsurer assumes some or all of the risk associated with the policies sold by the cedant in exchange for a portion of the premiums collected. The cedant remains responsible for servicing the policies and paying claims, but it can reduce its exposure to risk by transferring some of it to a reinsurer.

Question 43

explain how proportional insurance is handled/calculated using lines

Answer 43

For example, suppose that a property has an insured value of $1,000,000, and the insurance policy provides 10 lines of coverage, each representing 10% of the insured value. Each line, therefore, provides coverage for $100,000.

If the property suffers a loss that is covered by the insurance policy, the insurance company will pay out a proportionate amount of the loss based on the number of lines that have been purchased. For example, if the property suffers a $100,000 loss and the policyholder has purchased five lines of coverage, the insurance company will pay out $50,000 (50% of the total loss).

The premium for proportional insurance is typically calculated based on the number of lines purchased and the insured value of the property. The premium for each line is a fixed percentage of the insured value of the property, and the total premium is calculated by multiplying the premium per line by the number of lines purchased.

Question 44

Outline the different sellers and resellers of insurance

Answer 44

There are various sellers and resellers of insurance, including:

Insurance Companies: These are the primary sellers of insurance products. They underwrite and issue policies directly to individuals or businesses.

Agents and Brokers: These are intermediaries between insurance companies and policyholders. Agents work for one insurance company and sell its policies, while brokers work with multiple insurance companies and provide policy options from different providers to their clients. They help individuals and businesses choose the right insurance coverage for their needs.

Captive Agents: These are agents who work exclusively for one insurance company and only sell its policies.

Independent Agents: These agents work with multiple insurance companies and offer a variety of policy options to their clients.

Online Aggregators: These are websites that allow individuals to compare and purchase insurance policies from different companies. They provide an online platform for customers to browse and purchase insurance products.

Banks and Financial Institutions: Some banks and financial institutions offer insurance products to their customers. They partner with insurance companies to offer policies to their clients.

Employer-Sponsored Insurance: Many employers offer health insurance as part of their employee benefits package. They purchase group insurance policies from insurance companies and offer coverage to their employees.

Reinsurance Companies: These companies provide insurance coverage to insurance companies. They help insurance companies manage their risk by taking on a portion of the risk associated with the policies they issue.

Wholesale Brokers: These brokers provide insurance products to retail brokers who sell insurance policies to their clients. Wholesale brokers specialize in providing coverage for hard-to-place risks, such as high-risk drivers or properties with a history of claims.

Managing General Agents (MGAs): MGAs are appointed by insurance companies to underwrite and manage insurance policies on their behalf. They specialize in specific types of insurance, such as niche markets or high-risk coverages.

Question 45

What is the difference between a proprietary and mutual insurance company?

Answer 45

proprietary companies are the majority of insurance sellers and are owned by shareholders who receive profits in the form of dividends. In contrast, mutual companies are owned by policyholders who share in any profits made and may enjoy lower premiums or higher life assurance bonuses. Mutual companies may have difficulty raising additional capital since they cannot issue additional shares like proprietary companies can.

Question 46

How do ethics play a role in the insurance industry?

Answer 46

t ethical standards are considered very important in the insurance industry, and it is crucial that all those who work in insurance follow a set of ethical standards. The Chartered Insurance Institute (CII) has developed a Code of Ethics for all its members to follow. This code includes principles such as acting with integrity, treating customers fairly, and maintaining professional competence. Following ethical standards can help build trust with customers and other stakeholders, which can ultimately benefit the company’s long-term interests.

Question 47

Can you explain the concept of “treating customers fairly” and why it’s important?

Answer 47

“treating customers fairly” (TCF) is a central theme of FSA regulation and is considered so important that it needs to be a central part of insurance business philosophy. The FSA aims to achieve several outcomes with regard to how customers are treated, including ensuring that consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture, that products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly, and that consumers are provided with clear information and kept appropriately informed before, during, and after the point of sale. Treating customers fairly can help build trust with customers, which can lead to increased loyalty and ultimately benefit the company’s long-term interests.

Question 48

Different types of insurance organisations

Answer 48

1. Proprietary companies: These are the majority of insurance sellers and are owned by shareholders who receive profits in the form of dividends.
2. Mutual companies: These are owned by policyholders who share in any profits made and may enjoy lower premiums or higher life assurance bonuses. Mutual companies may have difficulty raising additional capital since they cannot issue additional shares like proprietary companies can.
3. Lloyd’s of London: This is a marketplace where members join together as syndicates to insure risks. Members can be individuals, corporations, or other entities.
4. Reinsurance companies: These companies provide insurance to other insurance companies to help them manage their risk exposure.
5. Captive insurers: These are insurance companies that are wholly owned by the company they insure, and they exist primarily to insure the risks of their parent company.
6. Government insurers: Some countries have government-run insurance programs that provide coverage for certain types of risks, such as healthcare or natural disasters.
7. Insurance brokers: These are intermediaries who help customers find and purchase insurance policies from various insurers.

Question 49

Different sellers and distributors of insurance

Answer 49

1. Direct insurers: These are insurance companies that sell policies directly to customers, without the use of intermediaries.
2. Independent intermediaries: These are brokers who work independently and offer policies from multiple insurers.
3. Agents: These are intermediaries who work for a specific insurance company and sell policies on their behalf.
4. Building societies: These are financial institutions that offer a range of financial services, including insurance products.
5. Banks: Many banks also offer insurance products to their customers.
6. Retailers/affinity groups: Retailers sometimes offer insurance products as an additional service to their normal business, often branded with their own name but underwritten by an insurance company or Lloyd’s syndicate.
7. Travel agents/tour operators: Some travel agents and tour operators offer travel insurance as part of their packages.
8. Aggregators: These are websites that allow customers to compare prices and features of different insurance policies from various insurers in one place.

Question 50

Importance of other stakeholders

Answer 50

, it is important to understand the impact that stakeholders have in a business.

Stakeholders are people or groups of people who have an interest in the way a company acts.
Principal examples of stakeholders include customers, shareholders, the government, regulators, the public, and employees.

However, there are others such as creditors/suppliers, consumerists, the law and unions. Stakeholders may or may not have any formal authority in a company but each does have some vested interest in the organization such as an investment or employment.

As a result, they will want something from the company and will often want to apply some influence in one way or another. Understanding and managing relationships with stakeholders is important for businesses to succeed in today’s market.

By meeting their needs and expectations, businesses can build trust with stakeholders which can lead to increased loyalty and ultimately benefit the company’s long-term interests.