The Fundamental Principles of Insurance Flashcards
What is the main purpose of insurance?
paying claims to policyholders should they cover a loss or damage covered by the terms of insurance.
Insurance is a method of risk transfer.
Definitions of ‘risk’
- the possibility of something unfortunate happening
- the possibility of a loss
- a peril occurring
- the subject-matter of insurance
Name 2 different attitudes to risk?
- Risk seeking = people who are willing to carry certain risks themselves
- Risk averse = people happier to minimise the risk to which they are exposed (by transferring the risk by means of insurer)
What are the components of risk management?
(IAR)
1. identification
2. analysis
3. risk control
Define frequency and severity?
- Frequency = how often it will happen
- Severity = how serious it will be if it does happen
What are the 6 categories of risk?
Financial and non-financial.
Pure and speculative.
Particular and fundamental.
Provide an example of each category of risk.
Financial - Damage to a car.
Non-financial - pandemics, floods, reputation.
Pure - travelling in an aircraft.
Speculative - the national lottery.
Particular - theft of personal possessions.
Fundamental - famine, economic recession.
Name the risks that are insurable.
Those that are: financial, pure and particular.
What is the concept of pooling risks?
By pooling risks the losses of the few are met by the contributions of the many who are exposed to similar potential losses.
What is the law of large numbers?
when there is a large number of similar situations, the actual number of events tends towards the expected number. Allows insurers to calculate likely losses and charge a premium.
Define Peril and Hazard.
- Peril = that which gives rise to a loss.
- Hazard = that which influences the operation or effect of the peril. E.g. lack of sprinklers.
What are the types of hazard and give examples.
- Physical hazard = a physical and measurable characteristic. E.g. properties construction.
- Moral hazard = arises from the attitude and behavior of people. E.g. Carelessness, dishonesty.
What features do insurable risks have?
They are financial, pure, and particular, but also:
1. fortuitous (accidental)
2. Insurable interest (financial relationship)
3. Not against public policy (legal)
4. Homogenous exposures (similar risks)
Name the primary functions of insurance (3).
- Spreading the risk
- Providing a degree of certainty
- Transferring risk
Name the secondary functions of insurance (4).
- Companies don’t need to a ‘safety net’ of £
- Companies can expand business
- Protects jobs
- Losses are reduced in size and number
Reasons for compulsory insurance and examples?
- provides funds for compensation
- in response to national concerns
- reputation of profession
E.g.
- Employers’ Liability Insurance
- Motor insurance
- PI insurance
What is an equitable insurance premium?
Each insured joining a pool pays an equitable (fair) contribution to the pool. Ensures successful operation of the pooling system.
What is a a financial risk?
A risk that is capable of financial measurement and one that you can acquire insurance for.
What is a non-financial risk
A risk that is not capable of financial-measurement and cannot be insured.
What is a pure risk?
A risk where there is a possibility of a loss but NOT of a financial gain. This risk is insurable.
What is a speculative risk?
A risk where there is a possibility of making both a gain and a loss. This risk is not insurable.
What is a particular risk?
A risk that affects individuals and not the entire community. These risks are insurable.
What is a fundamental risk?
A risk that is so widespread in its affect that it is uninsurable. It arises from social, economic, political, or natural causes.
Define risk management.
The identification, analysis and economic control of those risks which can threaten the assets or earning capacity of an enterprise.
