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LM1 > Chapter 1 > Flashcards

Chapter 1 Flashcards

1
Q

Risk-seeking

A

Willing to carry certain risks themselves

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2
Q

Risk-adverse

A

Minimising the risk to which they are exposed - e.g. insurance

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3
Q

Which insurance is compulsory for individuals in the UK

A

Third-Party

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4
Q

Function of risk management

A

Identification -> Analysis -> Control

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5
Q

Risk identification

A

Discovering it’s possible existing and potential future of threats

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6
Q

Risk analysis

A

Risk managers examine passed data to evaluate or analyse the risk

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7
Q

Risk control

A

Some course of action should be put into place to control reduce or even eliminate the risk

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8
Q

Components of risk

A
  • Uncertainty
  • Level of risk
  • Peril & hazard
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9
Q

Uncertainty

A

Implies doubt about the future as a result of being unable to predict what is going to happen

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10
Q

Level of risk

A

Risk relates to the different levels of risk that exist.
We know that there is a greater likelihood of something is happening than others.

Frequency and severity

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11
Q

Frequency

A

How often it will happen

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12
Q

Severity

A

How serious it will be if it does happen

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13
Q

Categories of risk

A
  • Financial and non-financial risks
  • Pure and speculative risks
  • Particular and fundamental risks
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14
Q

Pure risk

A

Where there is the possibility of a loss but not of gain, and where the best that we can achieve is a breakeven situation

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15
Q

Speculative risks

A

Only speculate with a view to making some kind of gain.

E.g national lottery or investing in the stock market

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16
Q

Fundamental risks

A

Some risks that occur on such a vast scale that they are uninsurable. E.g economic recession

They can be defined as those that arise from social. economic, political or natural causes and are widespread in their effect

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17
Q

Particular risks

A

Are localised or even personal in their cause and effect.

E.g. a storm might not affect all houses in the area

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18
Q

Insurable risks

A

Financial - Pure - Particular

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19
Q

Features of insurable risks

A
  • Fortuitous event
  • Insurable interest
  • The risk itself must not be against public policy
  • The risk must generally not be a one-off
20
Q

Fortuitous event

A

It must be accidental or unexpected and not inevitable for the insured.
Certainly not deliberate too!

21
Q

Insurable interest

A

Is the legally recognised financial relationship between the insured and the object or liability that is being insured.
E.g. someone else cannot insure your car

22
Q

Public policy

A

Contracts must not be against public policy or go against what society considers to be the right one right thing to do. Insurers should not therefore cover risks that are against public policies.

23
Q

Homogenerous exposures

A

The risks are similar to those seen before.

A significant number of exposures to similar risks historical patterns and trends will enable an insurer to forecast the expected extent of future losses.

24
Q

Pooling of risk

A

Gathering money of those insured and sets up pools.
The contribution informal premiums from the menu should go into this pool. From the pool payments are made to compensate the losses of those I have claimed.

25
Q

Law of large numbers

A

Where there are a large number of similar situations, actual number of events of current events occurring towards expected number.
E.g. you would expect to get the same amount of heads or tails after flipping the coin 5,000 times.

26
Q

Equitable premiums

A

Number of pools to be set up. E.g Car insurance and another pool for property insurance.

^ each insured wishing to join the pool must be prepared to make an equitable (fair) contribution to that pool.

27
Q

Peril

A

It’s the thing that is being insured against E.g. a fire.

Can be defined as that which gives rise to a loss.
E.g. lightening - when it occurs, this natural peril can result in damage

28
Q

Hazard

A

Can be defined as that which influences the operation or effect of the peril.

E.g. if a fire broke out (the peril) the lack of sprinklers (the hazard) as it has potential to make the damage worse

29
Q

Physical Hazard

A

Relates to the physical characteristics of the risk and include any measurable dimension of the risk.
E.g. security protection at a shop or age of insured and type of car (motor insurance)

30
Q

Moral hazard

A

Arises from the attitude and behaviour of people

31
Q

Secondary function of insurance

A

Ability to enhance the business.

  • Companies don’t need to set large amounts aside as safety nets.
  • It allows the business to expand.
  • Jobs are protected.
  • Insurers have the opportunity to invest their funds.
32
Q

Compulsory insurance - private individuals

A

Motor insurance and public liability insurance (in respect of dangerous animals)

33
Q

Compulsory insurance - professions and businesses

A

Motor insurance and employers liability insurance.

Public liability insurance is also compulsory for specific trades/professions.

Solicitors and other professionals must have a professional indemnity insurance.

34
Q

Main reasons why certain forms of insurance are compulsory

A
  • To provide funds for compensation
  • In response to national concerns
  • Reputation of the professions
35
Q

Database for policies

A

Employers liability tracing office (ELTO) and insurers have to publish info within 3 months

36
Q

ERN & EL

A

Employee reference number

Employers liability

37
Q

Primary functions of insurance

A
  • Spreading the risk
  • Providing the insured with a degree of certainty
  • Transferring the risk
38
Q

How would you best describe the sentimental value of a piece of jewellery

A

A non financial risk

39
Q

Explain the difference between Peril and Hazard

A

Peril causes the loss and Hazard can possibly make it worse

40
Q

Which of the following is not one of the steps involved in risk management:

  1. Analysis
  2. Control
  3. Subrogation
  4. Identification
A
  1. Subrogation
41
Q

Which principle states that where there are a large amount of similar situations, the actual amount of events occurring tends towards the expected amount?

A

The law of large numbers

42
Q

What proportion of the business written in the London Market is from UK based insureds?

A

25%

43
Q

Risks that occur on such a vast scale that they are uninsurable are called

A

Fundamental risks

44
Q

What should risk control consider?

A
  1. What is the likelihood of the risk actually happening?

2. Considering the likely impact

45
Q

What is the minimum required limit of indemnity (Employers Liability Insurance)

A

£5 Million - although the insurance market provides £10 Million as standard.

LM1 (7 decks)

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