Risk and Insurance Flashcards
What is the definition of Risk?
- Possibility of an unfortunate occurrence
- Doubt concerning the outcome of a situation
- Unpredictability
- (there is a chance of a gain)
How is a risk insured?
- The owner pays a premium to the Insurer
- In return the insurer accepts future unknown cost of the insured risk
Risk-seeking
Individuals who are willing to carry out certain risks themselves
Risk-averse
Individuals who lean towards minimising the certain risk they are exposed to
Advantages of Risk Management
+ reduces loss by identifying and managing hazards
+ increases shareholders confidence in a company’s ability to manage risks
+ disciplined approach to quantifying risks
What is Risk Management?
IDENTIFY RISK —> ANALYSE RISK —> CONTROL RISK
- IDENTIFY = discover threats that exist or future risks
- ANALYSE = examine past data so future trends can be predicted
- CONTROL = Physical controls (e.g locks on doors), Financial controls (e.g. taking out insurance to transfer the risk), Developing good risk culture (e.g. educating employees on how to avoid/reduce risks)
What types of Risks are there?
Financial / Non-financial Risks
Pure / Speculative Risks
Particular / Fundamental
Fortuitous / Deliberate
Insurable Interest / No Insurable interest
Not against public policy / Against public policy
Homogenous exposures / one off’s (generally)
Insurable Risks
Financial = must have a financial measurement e.g. accidental damage to a motor car, theft of property, loss of business profits after a fire, legal liability to pay compensation for personal injury to others
Pure = possibility of a loss only e.g. car accident
Particular = the risks is localised e.g. factory fire, car collision, theft of property from home
Fortuitous = must accidental, unexpected
Insurable = financial relationship between the insured and the object
Non Insurable Risks:
Non-financial = a risk that has no financial measurement
Speculative = possibility of a loss and gain
Fundamental = take place on a vast scale that it is uninsurable - arise from social, economical, political or natural causes e.g. earthquake, war, terrorism
Homogenous exposure
Have a sufficient number of exposures to similar risks, historical patterns.
Such trends enable an in surer to forecast the expected extent of future losses. The greater number of similar risks to insure, the closer the outcome of expecting the losses will be
Level of risk
How a risk is assessed:
A. Frequency of risk
B. Severity of risk
PERIL
That which gives rise to a loss
E.g. overflow of water tanks, lightning
HAZARD
That which influences the operation or effect of a peril
E.g. high value sports car, a safari holiday
Physical Hazard vs. Moral Hazard
Physical = physical characteristics of the risk e.g. security, construction of property, age of car
Moral = attitude or behaviour of people e.g. dishonesty, social attitude, carelessness
Pooling Of Risks
The loss of the few who suffer misfortune are met by the contribution of the premiums paid by those are exposed to similar potential loss
EQUITABLE PREMIUM
A number of pools are set up for each group of risks; each person joining the pool must be prepared to contribute an equitable (fair) contribution to that pool
Equitable contribution is taken into consideration by underwriters e.g. medical history, driving experience
CO-INSURANCE
- risk sharing between insurers: each insurer agrees a proportion of the premium and pays the same proportion of any losses that occur
- leading office is the first named in the insurance policy and is responsible of issuing the documentation
DUAL INSURANCE
Two or more policies are in force and are covering the same risk
