LO2: Understanding the fundamental principles of insurance

Question 1

risk management

Answer 1

• 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

Question 2

how can insurance be defined as a risk transfer mechanism

Answer 2

insurer accepts future potential risk by an insurer for an agreed premium

Question 3

risk meanings

Answer 3

• peril being insured (eg. fire)
• thing being insured
• thing being covered + the scope of cover required

Question 4

risk-averse vs risk-seeking

Answer 4

risk-averse want to transfer risk
risk-seeking want to carry risk

Question 5

AIRMIC meaning

Answer 5

association of insurance risk managers

Question 6

reasons for risk managment

Answer 6

• reduce the potential for loss
• gives shareholders confidence in how the business is run
• gives a framework for quantifying risk

Question 7

steps of risk management

Answer 7

• identification
• analysis
• control

Question 8

considerations of risk analysis

Answer 8

severity = number 1-3 with 3 most likely
likelihood = number 1-3

product of the two

Question 9

aspects of risk control

Answer 9

• physical (sprinklers)
• financial (contract wording)

Question 10

BRE meaning

Answer 10

building research establishment

Question 11

FPA meaning

Answer 11

fire protection association

Question 12

job of BRE/FPA

Answer 12

• providing construction guidelines
• research new construction methods
• provide reports on industrial processes

Question 13

components of risk

Answer 13

• uncertainty
• level of risk (frequency and severity)
• peril and hazard

Question 14

peril definition

Answer 14

that which gives rise to loss

Question 15

hazard definition

Answer 15

that which influences the operation or effect of the peril

Question 16

physical hazard

Answer 16

physical characteristics of the risk and any measurable dimensions of risk

Question 17

moral hazard

Answer 17

from the attitude and behaviour of people
- insured
- insured employees
- society
- how a business is run

Question 18

financial risks

Answer 18

financial means the outcome of an adverse event is measurable in financial terms (sentiment not included)

exception is benefit policies

Question 19

benefit policies

Answer 19

technically nonfinancial
compensation amount is preagreed
examples
- sickness
- personal accident
- life

Question 20

pure risk

Answer 20

only possibility of loss, none of gain

Question 21

speculative risk

Answer 21

possibility of loss and of gain

Question 22

fundamental risks

Answer 22

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)

Question 23

particular risks

Answer 23

localized/personal in their cause and effects

Question 24

features of an insurable risk

Answer 24

• fortuitous event
• insurable interest

also
- generally a one off
- cant be illegal or against what is generally seen as moral

Question 25

fortuitous event

Answer 25

accidental, unexpected

not inevitable

Question 26

insurable interest

Answer 26

legally recognized financial relationship between the insured and the liability

Question 27

objective risk
- exceptions

Answer 27

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

Question 28

pooling of risk concept

Answer 28

losses of the few are met by the contributions of the many, who are exposed to a similar risk

Question 29

law of large numbers
- what?
- hows it useful?

Answer 29

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

Question 30

equitable premium

Answer 30

premium charged in relation to the riusk introduced into the pool

Question 31

what effects peoples decisions to purchase insurance

Answer 31

• attitude to potential risk
• price they are prepared to pay
• if its a choice

Question 32

insurance primary functions

Answer 32

• spreading risk
• certainty (certain premium instead of unknown loss)
• transferring risk

Question 33

insurance secondary functions

Answer 33

• 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

Question 34

compulsory insurance

Answer 34

• 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)

Question 35

reasons for compulsory insurance

Answer 35

• provide funds for compensation
• national concerns
• reputation of professionals

Question 36

act that made employer liability compulsory

Answer 36

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

Question 37

act that made motor insurance compulsory

Answer 37

road traffic act 1988
treaty of rome
first (eu) motor insurance directive 1972

• minimum third party property damage and third party bodily injury/death

Question 38

act that made riding company public liability compulsory

Answer 38

riding establishment act 1970

Question 39

act that made wild animal liability compulsory

Answer 39

dangerous wild animals act 1976
dangerous dogs act 1991

usually included in a standard household policy

Question 40

act that made professional indemnity insurance compulsory

Answer 40

solicitors act 1974
compulsory for fca authorisation

Question 41

role of claims personnel

Answer 41

• deal with claims efficiently and fairly and cost effectively
• ID invalid claims
• determine amount for reserves = funds needed to pay claims