The fundamental principles of insurance Flashcards
name 3 examples of risk in insurance
- the building might be damaged by fire or flood;
- someone working in or visiting the building might get
injured; or - someone else’s property might get damaged either by
parts of the building falling on it or whilst being stored in
the building.
how is a risk “insured”
By paying a known premium to an insurer in return for the insurer accepting future unknown cost of the risk.
The insurer does this by
promising to pay for loss, damage or liability as defined by the policy terms.
what is the definition of insurance
Insurance, therefore, is a means of
transferring the risk.
The acceptance of an unknown future potential risk by an
insurer for an agreed premium is a way of defining insurance as ____________
a risk transfer mechanism.
Name the 3 other meanings of risk
- peril being insured (e.g. fire or collision);
- subject-matter of insurance (e.g. the factory, ship or potential liability);
- The thing insured, such as the property itself, and the range of contingencies or scope of cover required (if the term is
used by an insurer, they often mean both of these).
What is the difference between risk seeking and risk adverse
Some people are willing to
carry certain risks themselves and are termed risk-seeking,
risk-averse, feeling
happier minimising the risk to which they are exposed.
However most individuals are not in a position to evaluate this effectively
Define risk management
‘The identification, analysis and economic control of those risks which can threaten the assets or earning capacity of an enterprise.’
what should risk management address and how ?
It should address methodically all the risks surrounding the
firm’s current, past and future activities
IAC
*Identification
*Analysis
*Control
Why is risk management important ?
- Reduces the risk for potential loss
- It increases confidence in shareholders that the business is being run properly
- It provides a disciplined approach to quantifying risk
what is Risk Identification
This step involves the company discovering its possible existing and potential future threats.
Not all of these risks will be insurable, but they must all be managed
Give me and example of an insurer identifying a risk
factory owner looking
for physical damage insurance for their buildings
- Insurer may become involved in helping o identify existing and potential risks through carrying out a physical examination or survey.
RISK analysis
When Risk managers examine past data to evaluate or analyse the risk.
What is the primary goal of risk control?
To control, reduce, or eliminate the risk
Risk control is essential when the risk has the potential for adverse consequences.
What is the most effective method of risk management?
Elimination of risk
However, elimination may be costly or impracticable.
What must be considered when eliminating or reducing risk?
The cost of doing so compared to the cost of the feared event happening
This cost-benefit analysis is crucial in risk management decisions.
True or False: Elimination of risk is always practical and cost-effective.
False
While elimination is the most effective method, it may not always be practical or cost-effective.
Fill in the blank: The elimination of risk will always be subject to the test of whether the _______ of doing so is reasonable.
cost
What are the two distinct aspects of controlling risk?
Physical controls and financial controls
Physical controls include measures like installing sprinklers and alarm systems, while financial controls involve ensuring contracts are well-worded.
Give an example of a physical control for risk management.
Installing sprinklers
Sprinklers can help mitigate fire risks in buildings.
Give an example of a financial control for risk management.
Well-worded contracts
Ensuring contracts specify responsibilities, such as a security firm accepting responsibility for cash while in its control.
True or False: Financial controls include physical installations like alarm systems.
False
Financial controls relate to contractual agreements, not physical installations.
Fill in the blank: _______ controls involve measures like installing sprinklers and alarm systems.
Physical
Physical controls are tangible measures to mitigate risks.
what are the components of risk
*UNCERTAINTY
- The concept of uncertainty implies doubt about the future, as a result of our incomplete ability to predict what is going to happen. If we could say with certainty what was going to happen, there would be no element of risk involved.
Level of risk
The second aspect of risk relates to the different levels of risk that exist. We know that there is a greater likelihood of some
things happening than others
