LDH Q&As Flashcards
How many standards are there in the Code of Professional Conduct for Financial Advice Services?
9 standards
The Privacy Act 2020 contains thirteen information privacy principles, Name 6 of them.
- The purpose of collection of personal information
- Sources of personal information
- The collection of personal information
- Manner of collection of personal information
- The storage and security of personal information
- Access to personal information
- Correction of personal information
- The need to keep it complete, up to date and accurate before you use it
- How long the personal information can be kept
What is a FAP?
Financial Advice Provider
Types of Risks
Risk is about probability; the probability of something occurring. Risk management focuses on the word ‘hazard’ and ‘risk’. A hazard is an event that could cause harm and risk is the probability of the event actually occurring. In insurance the word ‘hazard’ can be replaced by ‘peril’.
In terms of insurance, the insured are covered by an insurance policy that acts as a ‘risk-reducing’ investment in which the buyer pays a small fixed amount to be protected from a potential large loss.
Pure Risk
Pure risk is a category of risk in which the following features apply:
There are two possible outcomes, there is a loss or there is no loss.
There can be no beneficial result.
Pure risk is related to events that are beyond the risk-takers’ control.
A person cannot consciously take on pure risk.
Only pure risks can be insured (insurable risks).
While most common pure risks are insurable, standard insurance policies do not cover every cause of loss, as insurers have specific criteria (underwriting criteria) around what they will and won’t insure.
Personal Risk
Personal risk affects people directly, such as illness, disability or death.
Types of products that cover the costs of losses due to these risks are:
- Life Insurance
- Trauma Insurance
- Income Protection Insurance
- Health Insurance
Property Risk
Property risk relates to the risk of loss or damage to assets or property.
Property risk can be further categorised into losses:
- Direct losses - Incurred because of damage to the property itself.
- Consequential losses (indirect losses) - Incurred as a result of direct damage or destruction of the property, etc.
Hidden losses
That occur due to direct and consequential losses, such as a decrease in staff productivity, legal penalties, etc.
Liability Risk
A liability risk is the risk of a person or company facing costs for financial loss or damage as a result of their activities.
Liability can arise in various ways:
Negligence - Where a company or person has been negligent in some way or failed to carry out their activities with due care:
- Left the heater on causing fire damage to a landlord’s property.
- Failed to put the handbrake on a fork hoist, it rolled into the neighbours building causing damage.
Strict liability - Where liability arises out of law or tort (case law) regardless of any negligence on their part:
- Hazardous Activities - where an occupation carries a strict requirement to prevent loss, damage or injury.
- Product Manufacture – a failed product can cause third party damage or injury even if no negligence has occurred in the manufacture.
Speculative Risk
A speculative risk refers to something that cannot be predicted to yield a profit or loss. It is, however, taken on by somebody who is aware of the uncertainty. This type of risk is less likely to be insured.
When an outcome cannot be predicted but results from choices that a person makes of their own volition or free will, that risk is considered speculative.
Someone who invests in stock for instance, invests in a speculative risk- they cannot tell whether the price will go up or down.
Gambling is a classic example of speculative risk- the gambler cannot tell for sure if they will win or lose.
Speculative risk is a category of risk that has the following three characteristics:
- There are 3 possible outcomes: loss, no loss, or gain.
- All speculative risk is made as conscious choices and is not just a result of uncontrollable circumstances.
- Speculative risk is the direct opposite of pure risk.
Speculative risks are generally uninsurable. Almost all investment type activities are considered as speculative risk, because the investor doesn’t know whether their investment will be a success or a failure. (Naylor, 2005)
Insurable Risk
Insurable risks are risks that insurance companies are prepared to cover. These include a wide range of losses, including those from a death, disability, a serious medical issue or, injury.
Like any business, an insurance company needs to make a profit to be sustainable. Even co-op insurance providers need to make enough money to meet their overhead costs, costs of claims and return any money left over to the members (usually by way of keeping premiums at an affordable level, rather than paying a dividend like a company listed on the share-market.)
Insurable risks have the following characteristics:
The risk can’t be so catastrophic that the insurer would never be able to pay for the loss (catastrophic risks such as war and pandemics are usually excluded from insurance policies).
The risk is well-defined and has a clear, measurable value that can’t be influenced by the policyholder.
The risk is random, not within the policyholder’s control; and the policyholder cannot cause or influence the loss.
There must be a sufficient number of insureds subject to the same risk, so that all policyholders’ combined premiums can share in the cost of any losses – but it must be unlikely that all policyholders will suffer a loss at the same time.
Restrictions to What Risks Can be Insured
Many pure risks and some non-performance risks can be transferred to insurance.
There are also some other considerations to determine if a risk is insurable. Below are some typical situations that insurers are not able to provide cover for:
- Loss or damage that is not unforeseen or accidental – insurers do not wish to insure deliberate or intended loss:
- If the insured is involved in an illegal operation (a drug-runner would not be legally insured).
- If the parties to the contract are not legally able to enter into a contract (if they are not old enough or not of sound mind).
- Where there is a poor moral risk such as the potential insured has been involved in theft, fraud and dishonesty. Insurers are reluctant to cover these risks.
- If the risk or probability of an event occurring is reasonably able to be calculated.
- Whether the value of a loss that may occur is measurable.
- Whether the risk can be shared amongst a group of insured’s, where the loss of the total group cannot occur (i.e. a catastrophe to 100% of the pool)
Name two types of Liability risk.
- Negligence
- Strict Liability
What is a Pure Risk?
Pure risk is a category of risk in which the following features apply:
- There are two possible outcomes, there is a loss or there is no loss
- There can be no beneficial result
- Pure risk is related to events that are beyond the risk-takers’ control
- A person cannot consciously take on pure risk
Only pure risks can be insured (insurable risks)
