Risk and Insurance Flashcards
Risk (4 statements)
*possibility of an unfortunate occurrence
*doubt concerning the outcome of a situation
*unpredictability
*the possibility of loss
Risk Transfer Mechanism
the accepting of an unknown future potential risk by an insurer for an agreed premium
UW definition of risk
the peril insured or the thing (eg the building) insured - ie what is being insured
risk seeking
lean more towards risk
risk averse
lean away from risk
risk management
taking control and developing a formal strategy for managing the risks that affect business
why is commercial risk management important
*reduces potential for loss by identifying and managing hazards
*give shareholders confidence in companies risk management
*provides disciplined approach to quantifying risk
Key steps of Risk Management
- risk identification
*risk analysis
*risk control (including the possibility of risk transfer)
Risk identification
discovering the threats that already exist and future risks
Risk analysis
examining past data to analyse the risk and predict future risks
Risk control
a course of action to reduce, control and potentially eliminate risk
types of risk control
*physical - eg putting locks on foors
*financial - eg transferring risk by insurance
*good risk culture - eg educating employees
Components of risk (4)
*uncertainty
*level of risk
*peril & hazard
*physical & moral hazard
Peril
that which gives rise to a loss
Hazard
that which influences the operation or effect of the peril
Categories of risk
*financial risk
*pure risk
*particular risks
Financial risk
risk must be measurable in financial terms
Pure risk
possibility of loss not gain
Particular risk
locallised risk or even personal in their cause and effect - eg a factory fire
Features of insurable risk
*a fortuitous event
*insurable interest
*not against public policy
*homogeneous exposures
a fortuitous event
accidental or unexpected
homogeneous exposure
given a sufficient number of exposures to similar risks - the insurer can forecast the expected frequency and likely extent of business
Uninsurable risks
*non-financial
*speculative
*fundamental
speculative risks
may involve three possible outcomes - loss, break-even or gain
