LO2: Understanding the fundamental principles of insurance Flashcards
risk management
- risk measurement and attempts to deal with the risk
- the identification, analysis and economic control of risks which threaten the assets or earning capacity of an enterprise
how can insurance be defined as a risk transfer mechanism
insurer accepts future potential risk by an insurer for an agreed premium
risk meanings
- peril being insured (eg. fire)
- thing being insured
- thing being covered + the scope of cover required
risk-averse vs risk-seeking
risk-averse want to transfer risk
risk-seeking want to carry risk
AIRMIC meaning
association of insurance risk managers
reasons for risk managment
- reduce the potential for loss
- gives shareholders confidence in how the business is run
- gives a framework for quantifying risk
steps of risk management
- identification
- analysis
- control
considerations of risk analysis
severity = number 1-3 with 3 most likely
likelihood = number 1-3
product of the two
aspects of risk control
- physical (sprinklers)
- financial (contract wording)
BRE meaning
building research establishment
FPA meaning
fire protection association
job of BRE/FPA
- providing construction guidelines
- research new construction methods
- provide reports on industrial processes
components of risk
- uncertainty
- level of risk (frequency and severity)
- peril and hazard
peril definition
that which gives rise to loss
hazard definition
that which influences the operation or effect of the peril
physical hazard
physical characteristics of the risk and any measurable dimensions of risk
moral hazard
from the attitude and behaviour of people
- insured
- insured employees
- society
- how a business is run
financial risks
financial means the outcome of an adverse event is measurable in financial terms (sentiment not included)
exception is benefit policies
benefit policies
technically nonfinancial
compensation amount is preagreed
examples
- sickness
- personal accident
- life
pure risk
only possibility of loss, none of gain
speculative risk
possibility of loss and of gain
fundamental risks
take place on such a large scale that they are uninsurable (famine or recession)
arise from social, economic, political or natural causes
can be insured (like war) but more difficult due to a lack of appetite from the market in general (london market often takes on such risks)
particular risks
localized/personal in their cause and effects
features of an insurable risk
- fortuitous event
- insurable interest
also
- generally a one off
- cant be illegal or against what is generally seen as moral
fortuitous event
accidental, unexpected
not inevitable
insurable interest
legally recognized financial relationship between the insured and the liability
objective risk
- exceptions
sufficient exposure to similar risks (homogenous exposures) historically. allow insurers to forecast the expected extent of future losses
not the case for
- risk in a new area
- new type of risk
pooling of risk concept
losses of the few are met by the contributions of the many, who are exposed to a similar risk
law of large numbers
- what?
- hows it useful?
with a large sample the number of events occurring will tend towards the expected value
helps with the prediction of claims if they are similar in nature
equitable premium
premium charged in relation to the riusk introduced into the pool
what effects peoples decisions to purchase insurance
- attitude to potential risk
- price they are prepared to pay
- if its a choice
insurance primary functions
- spreading risk
- certainty (certain premium instead of unknown loss)
- transferring risk
insurance secondary functions
- frees up capital
- gives confidence for business expansion
- job protection
- lower loss severity and frequency (risk management that comes with insurance causes this not insurance itself)
- insurers invest in funds (benefit the economy)
- invisible exports (service) : 25% of business written in the london market is from the uk, <20% for lloyds and 50% for company market
compulsory insurance
- motor insurance
- public liability for dangerous wild animals and dogs (individual)
- employer liability insurance
- public liability or specific trades (horse riding, solicitors and service professionals)
reasons for compulsory insurance
- provide funds for compensation
- national concerns
- reputation of professionals
act that made employer liability compulsory
employers liability (compulsory insurance) act 1969
covers injury and diseases related to the their work/employment
exemptions are family members and government agencies
policies stored in the employers liability tracing office database
act that made motor insurance compulsory
road traffic act 1988
treaty of rome
first (eu) motor insurance directive 1972
- minimum third party property damage and third party bodily injury/death
act that made riding company public liability compulsory
riding establishment act 1970
act that made wild animal liability compulsory
dangerous wild animals act 1976
dangerous dogs act 1991
usually included in a standard household policy
act that made professional indemnity insurance compulsory
solicitors act 1974
compulsory for fca authorisation
role of claims personnel
- deal with claims efficiently and fairly and cost effectively
- ID invalid claims
- determine amount for reserves = funds needed to pay claims
