LM1 Chapter 1 - Fundamental principles of insurance

Question 1

What is an individual called who is keen to remove risk where possible?

Answer 1

Risk-averse

Question 2

A factory installing sprinklers into the premises is an example of which risk activity?

Answer 2

Risk control

Question 3

How would you describe the pattern of losses for Aviation?

Answer 3

Low frequency and high severity

Question 4

Why is the chance of winning the lottery uninsurable?

Answer 4

You cannot insure risks where there is a chance of making a gain

Question 5

What does homogeneous exposure mean?

Answer 5

The risks are similar to those seen before

Question 6

What are some examples of secondary functions of insurance?

Answer 6

• Ability to enhance the business
• Invisible exports (services)
• Losses are reduced in size and number
• Jobs are protected

Question 7

What are some examples of the primary functions of insurance?

Answer 7

• Spreading the risk
• Providing a degree of certainty
• Transferring risk

Question 8

What is the definition of risk?

Answer 8

There is no universally recognised definition for the term risk

Question 9

How is insurance a risk transfer mechanism?

Answer 9

It is the acceptance of an unknown future potential risk by an insurer for an agreed premium

Question 10

What four things can be done to deal with risk?

Answer 10

• Avoiding risk
• Minimising risk
• Managing risk
• Transferring risk

Question 11

What are the components of risk?

Answer 11

• Uncertainty
• Level of risk
• Peril
• Hazard

Question 12

What is Peril?

Answer 12

The thing that is being insured against, e.g. fire

Question 13

What is Hazard?

Answer 13

Something about the risk that may make the peril worse, e.g. no sprinklers in a building

Question 14

How can hazard be described?

Answer 14

As Physical or moral and both will be considered by the insurers

Question 15

What are the ways of categorising risk?

Answer 15

Risk can be categorised as:
- Speculative
- Fundamental
- Particular
or
- Financial
- Non-Financial

Question 16

What is important to remember about risk?

Answer 16

Not all risks are insurable

Question 17

What are some features of an insurable risk?

Answer 17

Must be of a financial nature
Pure rather than speculative
Particular rather than fundamental

Question 18

Some more features of insurable risks?

Answer 18

The risk must be a fortuitous event, must be an insurable interest
Must not be against public policy

Question 19

Pooling of risk?

Answer 19

All insured contribute to the pool by paying in a fair premium for the risk that they bring to the pool and they can make claims on the pool should they suffer a loss.

Question 20

What are reasons for an individual (or a business) to purchase insurance?

Answer 20

• Their attitude to their potential risk
• What price they are prepared to pay for the peace of mind
• The extent to which they feel they have a choice about insuring the
  risk

Question 21

What is compulsory insurance?

Answer 21

Insurance you have to purchase such as motor and employers’ liability insurance

Question 22

What are financial and non-financial risks?

Answer 22

Risks we can and cannot measure financially. For example theft of jewellery the financial value will be current market value no extra pay is added on for the owners sentimental value and care for it as it is not measurable in financial terms

Question 23

What is a speculative risk?

Answer 23

Speculating to make a risk with a chance to make a gain. For example the lottery or gambling

Question 24

What is a pure risk?

Answer 24

Where there is a possibility of a loss but not of a gain. For example flying in a plane

Question 25

What is a fundamental risk?

Answer 25

Risks that occur on such a large scale they are uninsurable. For example famine or economic recession

Question 26

What is a particular risk?

Answer 26

These are localised or even personal in their cause and effect. For example a car collision or a factory fire.

Question 27

What is a fortuitous event?

Answer 27

For something to be insurable it needs to be fortuitous meaning that it is accidental or unexpected and not inevitable, for the insured

Question 28

How do insurers charge clients fair premiums?

Answer 28

By pooling the risks

Question 29

What is a physical hazard?

Answer 29

The physical characteristics of the risk, including any measurable dimension of the risk.

Question 30

What is a moral hazard?

Answer 30

The attitude and behavior of people bringing about risk.

Question 31

What is the definition of risk management?

Answer 31

The identification, analysis and economic control of those risks which can threaten the assets or earning capacity of an enterprise.

Question 32

Give three reasons why risk management is important?

Answer 32

Reduces potential for loss
Shareholder confidence regarding business management
Disciplined approach to quantifying risk

Question 33

What are the three steps involved in managing the risk?

Answer 33

Identification
Analysis
Control

Question 34

Who is someone who is willing to carry certain risks?

Answer 34

Risk-seeking

Question 35

What insurance is compulsory in the UK?

Answer 35

Third party motor
Public liability for riding establishments
liability insurance for dangerous animals
PI Insurance