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Lloyd's Insurance Market > Module 1: Insurance Principles > Flashcards

Module 1: Insurance Principles Flashcards

1
Q

Define Risk.

A

An uncertain event, which we don’t want to happen because of its negative consequences on our business or our life.

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2
Q

Name four examples of risks when running a business.

A
  1. Premises can be damaged by a fire, by a storm, by an electrical incident.
  2. An employee or customer could trip and have an accident.
  3. Your cargo can be stuck on a dockside somewhere due to a dockers’ strike.
  4. Your store can be broken into by burglars.
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3
Q

Name four examples of everyday life risks.

A
  1. You or your child can be hurt while playing sport.
  2. You or your children can damage someone else’s property.
  3. Your house can be flooded during a storm.
  4. Your car can be stolen.
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4
Q

What are the five main types of risk?

A
  1. Damage or destruction.
  2. Theft.
  3. Injury
  4. Business shutdown/ inability to work.
  5. Dishonesty or carelessness.
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5
Q

The business or individual that seeks insurance is called___?

A

The insured.

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6
Q

The business that provides insurance is called___?

A

The insurer.

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7
Q

An insurance contract is also called___?

A

A policy.

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8
Q

The sum of money paid by the insured to the insurer is called___?

A

The premium.

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9
Q

If a covered risk occurs, what action will the insured make?

A

The insured will make a claim to the insurer.

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10
Q

What word is used to describe the subject matter of the insurance (e.g. a house, a boat, a car) and the peril(s) being insured against (e.g. fire, theft, injury) ?

A

Risk.

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11
Q

One of the primary functions of insurance is to provide security and reduce financial exposure. What is another primary function?

A

Spread the cost of an insured loss amongst many policyholders.

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12
Q

What happens to the premiums paid by the insured to the insurers?

A

The premiums are pooled to form a large central pot from which claims will be paid.

The underlying idea is that the losses of the few will be spread amongst the many, who are also exposed to the perils, but are lucky enough not to have suffered a loss.

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13
Q

What are the six secondary functions of insurance?

A
  1. Organisations can avoid the need to put aside large amounts as emergency funds.
  2. Insurers invest premium funds to create extra income.
  3. Insurance is a substantial export from London to the rest of the world.
  4. The insurance market is a substantial employer.
  5. Insurance facilitates trade and enterprise.
  6. Provision of advice and assistance to clients.
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14
Q

For a risk to be included in an insurance policy, it must be quantifiable in___?

A

Monetary terms.

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15
Q

What might the insurer be expected to pay out for if -

  1. A car is accidentally damaged?
  2. A business loses profits following a factory fire?
  3. An employee is injured during work which the employer is legally liable?
A
  1. Cost of repair, up to the value of the car.
  2. Replacement earnings, based on historic data.
  3. Amount injury is worth according to accepted tables.
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16
Q

What is a Pure Risk?

A

A risk where there is the possibility of a loss, but never of a gain.

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17
Q

What is a Speculative Risk?

A

A risk where there is the possibility of a gain as well as a loss.

18
Q

What is a Fundamental Risk?

A

A risk that is so vast in scale that it is uninsurable.

They can arise from social, economic, political or natural causes.

EXAMPLE: the risk of famine or the risk of economic recession generally.

19
Q

What is a Particular Risk?

A

A risk that is localised in nature, even though the cause might be quite wide ranging.

EXAMPLES:

  • fire in a factory, which would impact the factory and perhaps some neighbouring buildings only but very rarely the whole community.
  • a domestic burglary, which would only impact the family in that house.
20
Q

What is Fortuity?

A

Something that is not certain to happen.

21
Q

The three golden rules to determine whether a risk is a Fortuity…

A
  1. The event is uncertain, either as to whether it will occur at all or it’s timing.
  2. There must be no deliberate behaviour on the part of the insured.
  3. The loss is unexpected on the part of the insured.
22
Q

What is Insurable Interest?

A

Insurable Interest is where the insured has a relationship with the subject matter of the insurance whereby if it is lost or damaged or causes loss or damage to another, then the insured will suffer financial loss.

23
Q

Give three examples of Insurable Interest.

A
  1. By buying a vehicle or property which might get damaged or stolen or cause damage to another.
  2. By having visitors onto a property who might injure themselves.
  3. Someone storing their goods in your warehouse which might get damaged or stolen.
24
Q

Is it possible to offer insurance against the risk of obtaining a speeding ticket?

A

It is not.

It is basic principle of contract law that contracts should not be against public policy.

In practice insurers should not cover risks which are against public policy.

25
Q

What six characteristics do Insurable risks have?

A

Insurable risks are:

  1. Pure
  2. Particular
  3. With Insurable interest
  4. Not against public policy
  5. Financial
  6. Fortuitous
26
Q

What six characteristics do Uninsurable risks have?

A

Uninsurable risks are:

  1. Speculative
  2. Fundamental (generally)
  3. No Insurable interest
  4. Against public policy
  5. Non-financial
  6. Certainty
27
Q

What are the five key considerations in the underwriting process?

A
  1. What is the peril?
  2. How likely is it going to happen?
  3. What steps are already taken to reduce the risk?
  4. What are the financial consequences of it happening?
  5. What are the hazards?
27
Q

What are physical hazards?

A

Hazards related to concrete and objective elements.

28
Q

What are moral hazards?

A

Hazards related to attitude and behaviour.

29
Q

Name six examples of physical hazards:

A
  1. Storage of flammable chemical in a factory.
  2. Insufficient fire equipment in an office.
  3. Thatch roof on a house.
  4. No burglar alarms on a jewellery store.
  5. Proximity of a river to a residential location.
  6. Lack of guards on machinery in a factory.
30
Q

Name some examples of moral hazards:

A
  1. An insured who is not interested in maintaining his property.
  2. An insured who has a history of inflated claims.
  3. An insured with a criminal record.
  4. An insured who was careless about safety in his factory.
31
Q

What is the level of exposure?

A

The level of exposure is the amount of insurance requested by the insured. For example the value of the vessel or life insurance required.

32
Q

How is premium calculated?

A

Sum insured x rate = premium

33
Q

How does the insurer calculate the rate per cent or per mile?

A

ACTUAL CLAIMS
(divided by)
VALUES INSURED =
RATE PER CENT

EXAMPLE:
£9m (actual claims)/ £450m (values insured) * 100 = Rate per cent

= 9/450 * 100 = 2%

34
Q

Name four types of insurance where the agreed some of money for the insurance coverage is calculated as an adjustable premium.

A
  1. Employers’ liability
  2. Professional indemnity
  3. Life
  4. Cargo
35
Q

What other elements must insurers add on after working out the basic premium for the risk?

A
  1. Operating costs expenses, including both their own staff and premises costs.
  2. Profit.
  3. Outstanding liabilities.
  4. Commissions paid to intermediaries.
  5. Other elements to consider: currency (fluctuations in exchange rates), inflation and competition (pricing premium correctly).
36
Q

What is brokerage?

A

Brokerage is a commission which insurers pay brokers when they introduce business to them.

37
Q

How do you calculate net premium?

A

Gross premium - brokerage and other deductions = net premium

38
Q

What two types of tax and charges must the insurers consider?

A
  1. Those which the insured has to pay, and insurers act as a collection agency, such as insurance premium tax (IPT) in the UK.
  2. Those which insurers themselves have to pay.
39
Q

In the event of a claim what will an insurer seek to establish?

A
  1. Whether there was Insurable interest.
  2. Whether the subject of the claim was insured at the time of the loss.
  3. Whether the loss was caused by an insured event, or peril.
  4. Whether the timing of the loss falls within the policy period.
40
Q

What are Ex gratia payments?

A
  • These are goodwill payments made by an insurer to an insured,
  • OR possibly to a claimant in the case of a liability policy,
  • that are not within the legal obligations defined by the insurance contract (the policy wording).
41
Q

What is claims reserving?

A

Claims reserving is the setting aside of adequate funds to meet estimated claims.

Lloyd's Insurance Market (12 decks)

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