LM1 Chapter 1 - Fundamental principles of insurance Flashcards
What is an individual called who is keen to remove risk where possible?
Risk-averse
A factory installing sprinklers into the premises is an example of which risk activity?
Risk control
How would you describe the pattern of losses for Aviation?
Low frequency and high severity
Why is the chance of winning the lottery uninsurable?
You cannot insure risks where there is a chance of making a gain
What does homogeneous exposure mean?
The risks are similar to those seen before
What are some examples of secondary functions of insurance?
- Ability to enhance the business
- Invisible exports (services)
- Losses are reduced in size and number
- Jobs are protected
What are some examples of the primary functions of insurance?
- Spreading the risk
- Providing a degree of certainty
- Transferring risk
What is the definition of risk?
There is no universally recognised definition for the term risk
How is insurance a risk transfer mechanism?
It is the acceptance of an unknown future potential risk by an insurer for an agreed premium
What four things can be done to deal with risk?
- Avoiding risk
- Minimising risk
- Managing risk
- Transferring risk
What are the components of risk?
- Uncertainty
- Level of risk
- Peril
- Hazard
What is Peril?
The thing that is being insured against, e.g. fire
What is Hazard?
Something about the risk that may make the peril worse, e.g. no sprinklers in a building
How can hazard be described?
As Physical or moral and both will be considered by the insurers
What are the ways of categorising risk?
Risk can be categorised as:
- Speculative
- Fundamental
- Particular
- Pure
or
- Financial
- Non-Financial
What is important to remember about risk?
Not all risks are insurable
What are some features of an insurable risk?
Must be of a financial nature
Pure rather than speculative
Particular rather than fundamental
Some more features of insurable risks?
The risk must be a fortuitous event, must be an insurable interest
Must not be against public policy
Pooling of risk?
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.
What are reasons for an individual (or a business) to purchase insurance?
- 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
What is compulsory insurance?
Insurance you have to purchase such as motor and employers’ liability insurance
What are financial and non-financial risks?
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
What is a speculative risk?
Speculating to make a risk with a chance to make a gain. For example the lottery or gambling
What is a pure risk?
Where there is a possibility of a loss but not of a gain. For example flying in a plane
What is a fundamental risk?
Risks that occur on such a large scale they are uninsurable. For example famine or economic recession
What is a particular risk?
These are localised or even personal in their cause and effect. For example a car collision or a factory fire.
What is a fortuitous event?
For something to be insurable it needs to be fortuitous meaning that it is accidental or unexpected and not inevitable, for the insured
How do insurers charge clients fair premiums?
By pooling the risks
What is a physical hazard?
The physical characteristics of the risk, including any measurable dimension of the risk.
What is a moral hazard?
The attitude and behavior of people bringing about risk.
What is the definition of risk management?
The identification, analysis and economic control of those risks which can threaten the assets or earning capacity of an enterprise.
Give three reasons why risk management is important?
Reduces potential for loss
Shareholder confidence regarding business management
Disciplined approach to quantifying risk
What are the three steps involved in managing the risk?
Identification
Analysis
Control
Who is someone who is willing to carry certain risks?
Risk-seeking
What insurance is compulsory in the UK?
Third party motor
Public liability for riding establishments
liability insurance for dangerous animals
PI Insurance
