Terminology (Chapt 1) Flashcards
What is the definition of risk?
Unfortunate happening
Unpredictability
Risk being insured, subject matter or thing insured
What are the 2 attitudes to risk?
Risk seeking
Risk adverse
What is the definition of risk management?
The identification, analysis and economic control of those risks which can threaten the assets or earning capacity of an enterprise
What are the 3 benefits of risk management?
Reduces potential for loss
Increases shareholder confidence
Disciplined approach to quantifying risk
The 3 stages of risk management
Identification - continuous and developing process of identifying risks. Insurer may give a report.
Analysis- risk manager can examine past data to evaluate risk
Control - control, reduce or eliminate risk
2 main ways of controlling risk
Physical - fire alarms etc. Can be an imposing requirement
Financial - contract wording, e.g. Cash responsibility when carried on person
What are the associations for risk?
Building research establishment (BRE), fire protection association (FPA). The Loss prevention council forms part of both of these
New construction methods, guidelines, reports on new processes to keep insurers informed
Components of risk
Uncertainty
Frequency and severity
Peril and hazard
Financial risk
A risk that can be financially measured such as by loss of profit.
Insurable
Non-financial risks
Such as the loss of a family heirloom that has sentimental value
Not insurable
Pure risk
A risk that is purely loss such as a fire etc. Applies to commercial setting
Can be insured
Speculative risk
Could be loss or gain
Lottery, stocks
Cannot insure risks that could gain
Fundamental risk
A risk that is so vast it is not insurable
War and nuclear risks
Insurers do not have capacity
Can appear in other London Market insurance such as marine cargo covered for war
Particular risk
A risk which is localised
E.g. There may have been a storm in a region, but it only affected some people
This can be insured. This is personal and therefore different to pure risks
Name the 3 insurable risks
Financial
Pure
Particular
Description of pooling risk
Equitable premiums put into pool which is used to cover losses
Each risk entered must have a proportionate premium (risk element)
Different pool for each class
Road traffic act 1988
Third party property and bodily damage
Related to movement of good under treaty of Rome
EU directed changes such as tracing insurer from license plate
Employers liability
1969
Minimum 5 mil
Employers liability tracing office allows to trace policies. Insurers publish to ELTO 3 months after inception
6 secondary functions of insurance
No safety net for business
Expansion
Job protection
Lower losses due to risk management
Economy - insurers are investors
Invisible exports
3 primary functions of insurance
Spreading risk between insurers
Degree of certainty for premium
Transference of risk
PRE-RATE CARD
Law of large numbers
If there is a larger number then the probability is closer to the expected e.g.
Flipping a coin
4 conditions that the 3 insurable risks need to meet
Fortuitous- unexpected
Insurable interest - legally recognised relationship between object and person e.g. Car
Public policy- cannot insure against criminal fines
Homogenous exposures - helps to have historic data so that potential for loss is more accurate and insurer can gage
capacity
Dangerous wild animals
1976, dangerous dogs 1991
Local authority must deem adequate
Insurers offer as extension of another policy such as liability of household
Professional indemnity
insurance
Solicitors act 1974
Professional negligence
If insurance intermediary is covered by the FCA it must have cover
Appointed representatives and introducers use insurers cover
Cover up to 1 mil
Claims personnel
Identify non valid claims
Assess and calculate costs
Instruct experts
Provide claims data
Definition of insurance being a risk transfer mechanism?
Moving the financial impact of a loss of insurers
What is not a main purpose of risk management?
Reducing the operating costs of a business
What is a type of loss is an example of high frequency/low severity?
Low speed car crash
How would you best describe the sentimental value of a piece of jewellery?
A non financial risk
Explain the difference between peril and hazard?
Peril causes the loss and the hard can possibly make it worse
How does a speculative risk differ from a pure risk?
A pure risk is one where there is no possibility of a positive outcome
Which key insurance term is used to define something which is neither expected nor intended?
Fortuitous event
For what main reason do insurers pool risk?
To enable them to charge each client a fair premium
What is not a primary reason for purchasing insurance?
Investment in the insurance industry
Which insurance is compulsory for individuals in the UK?
Third party motor
Give an example of a low frequency high severity risk
Earthquake not many claims but claims are large
The timing delay between claims occurring and eventually being settled/paid creates the what?
Claims reserve
What is insurance essentially?
A risk transfer mechanism
Identify six benefits of insurance to the economy as a whole
Releases capital
Encourages businesses to expand
Keeps employees in work
Reduces losses
Insurance companies are major investors
Invisible exports
What are the different types of risks?
Financial
Non-financial
Pure
Speculative
Particular
Fundamental
What are the main 4 things insurers will examine when deciding whether a risk is insurable?
Fortuitous event
Insurable interest
Public policy
Homogeneous exposure
Pure risk (not speculative)
Particular risk (some fundamental risks are insurable)
What is a financial control method?
Transferring risk by taking out insurance or by contract.
What is risk pooling?
Risk pooling is an insurance risk management practice which groups larger numbers of people together to minimize the cost impact of the highest-risk individuals.
If someone takes out insurance on everything they can, they are known as?
Risk averse
What is a particular risk?
A risk that is localized or even personal in their cause and effect E.G. Factory fire, car crash Etc..
