Study 1 Learning Objectives

Question 1

Learning Objective 1: Explain why pure risk is insurable but speculative risk is not.

Answer 1

o Risk means the chance of loss

• > Pure risk entails a chance of loss but no chance of profit. It is insurable.
• > Speculative risk exists where there is either a chance of loss or a chance of profit; it is uninsurable.

o Examples of insurable risks:

• > Personal risks
• > Property risks
• > Liability risks

o There are three classes of insurance:

• > Personal lines
• > Commercial lines
• > Special risks

Question 2

Learning Objective 2: Explain how losses are caused by perils but also influenced by hazards.

Answer 2

o Perils are events that may cause losses.
-> Insurance covers losses resulting from insured perils. For example, home insurance covers losses
from perils such as fire, riot, windstorm, etc.

o Hazards are conditions that may cause perils to occur or make losses more severe. They
include the following:
-> Physical hazards—for example, slippery floors, loose tiles, bare electrical wires.
-> Moral hazards—for example, dishonesty, financial problems, poor reputation.

Question 3

Learning Objective 3: Explain why a peril must be the proximate cause of loss, and not a remote cause of loss, to be covered by insurance.

Answer 3

o The proximate cause is the immediate and effective cause of the loss.

o In a chain of circumstances, it leads naturally and directly to the loss, but it is not
necessarily the last event before the loss. o A remote cause is not the proximate cause of loss and is separate from the proximate cause in a chain of events leading to a loss.
-> An immediate cause is not the proximate cause of loss but is the last link in a chain of events leading to a loss.

Question 4

Learning Objective 4: State the pre- and post-loss objectives of risk management.

Answer 4

o Objectives of risk management can be broken into two components:

• > Pre-loss objectives—those to be met before a loss occurs.
• > Post-loss objectives—those to be met after a loss occurs.

o Include venn diagram of pre- and post-loss objectives:

• > Pre-loss objectives:
• External Obligations
• Peace of Mind
• Cost of Risk
• > Social Responsibility
• > Post-loss Objectives:
• Survival
• Operational Continuity
• Stable Earnings
• Sustained Growth

Question 5

Learning Objective 5: Outline the five main steps in the risk management process

Answer 5

o The risk management process can be divided into five steps:
1. “Identifying and analyzing exposures”—commonly used methods include surveys, flow charts,
financial statements, and inspections.
2. “Formulating options”—using loss control techniques to control the exposure and prevent losses
or reduce their severity, and using loss financing techniques to pay for losses that do occur.
3. “Selecting the best techniques”—choosing the best technique or combination of techniques for
dealing with each exposure.
4. “Implementing the plan”—including a plan for implementing the risk-control program, a
communications plan, and a method to allocate costs.
5. “Monitoring and modifying”—regularly re-evaluating plans and making necessary changes is part
of an effective strategy