Principles of Insurance

Question 1

What is Insurance?

Answer 1

Insurance is a contract (legal agreement) between the insured (the first party) and the Insurer (second party) to provide compensation in the event of financial loss

Question 2

List 3 benefits of insurance

Answer 2

Risk transfer mechanism

Peace of mind

Encourages enterprise

Reduction of losses

Invisible exports

Investment by Insurers

Question 3

What are the 4 key concepts of ‘Risk’?

Answer 3

Uncertainty, Level of Risk, Peril, Hazard

Question 4

What 2 characteristics are used to measure the level of risk?

Answer 4

Frequency and Severity

Question 5

Give an example of a high frequency, low severity event:

Answer 5

A broken windscreen, broken window, minor car accident etc.

Question 6

What one word best describes ‘Risk’ in insurance terms?

Answer 6

Uncertainty

Question 7

Give an example of a physical and moral hazard:

Answer 7

Physical: Type of construction of a building, geographical location, vehicle modifications, security enhancements, thatched roof.
Moral: Age, occupation, convictions, previous claims, driving experience.

Question 8

A fire is caused by a smoker in bed. What is the peril and what is the hazard?

Answer 8

Peril = fire, Hazard = Smoker

Question 9

What is the definition of ‘Peril’?

Answer 9

An event that gives rise to a loss

Question 10

What is meant by the ‘Common Pool’?

Answer 10

The contributions of the many pay for the losses of the few

Question 11

What is meant by ‘Statute’?

Answer 11

Laws passed by the government

Question 12

What types of risk that are generally insurable?

Answer 12

Pure, Financial and Particular