Learning Outcome 1

Question 1

Describe the concepts of risk and risk perception

Answer 1

The word ‘risk’ is used in a number of different ways in the insurance market place. - no universal recognised definition.

Risk perception is defined by the fact we all take decisions based upon an assessment of risk.

Question 2

Definition of risk?

Answer 2

• Unpredictability
• The possibility of loss
• The possibility of an unfortunate occurrence.
• Doubt concerning the outcome of a situation
• The chance of gain (speculative risk, eg. the lottery)

Question 3

Explain the risk management function and process

Answer 3

The focus of risk management is the identification and treatment of defined risks

1. Risk identification: Involves discovering the threats and the potential threats.
2. Risk analysis: Risk managers will identify past data to evaluate or analyse risk.
3. Risk control: If the risk is seen to have potential for loss, some course of action should be put into place to control, reduce, or eliminate.

Question 4

Why is risk management important?

Answer 4

• Reduce the potential for loss by identifying and managing hazards,
• Gives shareholders a greater degree of confidence
• Provides a disciplined approach to quantifying risks.

Question 5

What are the various categories of risk

Answer 5

1. Financial risk
2. Non-financial risk
3. Pure risk
4. Speculative Risk
5. Particular Risk
6. Fundamental risk

Question 6

What is a financial risk?

Answer 6

A risk which can be quantified within terms of financial measurement. For example; accidental damage to a car.

Question 7

What is a non-financial risk?

Answer 7

A risk which cannot be quantified within terms of financial measurement. For example; a family heirloom

Question 8

What is a pure risk?

Answer 8

Pure risk are where there is a possibility of loss but no gain, the best scenario would be to break even. For example; driving to a location and arriving safely.

Question 9

What is a speculative risk?

Answer 9

Speculative risks are where there is potential for gain. For example; the lottery.

Question 10

What is a particular risk?

Answer 10

Particular risks are localised or even personal in their cause and effect. For example, a factory fire.

Question 11

What is a fundamental risk?

Answer 11

Fundamental risks arise from social, economic, political or natural causes and are widespread in their effect/ For example; an earthquake.

Question 12

Explain the components of a risk

Answer 12

• Uncertainty
• Level of risk
• Peril and hazard

Question 13

Explain the relationship between frequency and severity

Answer 13

Frequency - how often it will happen

Severity - how serious it will be if it does happen

Question 14

Explain the difference between a peril and hazard as they relate to insurance

Answer 14

• A peril can be defined as that which gives rise to a loss.
• A hazard can be defined as that which influenced the operation or effect of the peril.