Chapter 1 - Core Principles of Insurance Flashcards
A - Concept of Risk and Risk Transfer
A1 - Risk Perception
- Why is it difficult to define risk?
One person’s perception of a particular risk can be significantly different from another’s.
A - Concept of Risk and Risk Transfer
A1 - Risk Perception
- What is meant by Risk Management?
Measuring risk and the means of attempting to deal with it by applying scientific process.
A - Concept of Risk and Risk Transfer
A1 - Risk Perception
- What kind of questions does Risk Management ask in a commercial context?
“How much will it cost if things go wrong?”
“What are the chances of the risk becoming a reality?”
A - Concept of Risk and Risk Transfer
A2 - Definition of Risk
- What are the key elements contained in definitions of risk?
Uncertainty
Unpredictability
Danger (in some cases)
A - Concept of Risk and Risk Transfer
A2 - Definition of Risk
- What is meant by Risk Transfer?
The accepting of an unknown future potential risk by an insurer for an agreed premium.
A - Concept of Risk and Risk Transfer
A2 - Definition of Risk
- Why does Risk Transfer bring peace of mind to the insured?
Because they have replaced the uncertainty of possible future loss with the certainty of the agreed premium.
A - Concept of Risk and Risk Transfer
A4 - Attitude to Risk
- What is somebody who is willing to carry certain risks for themselves called?
Risk Seeking
A - Concept of Risk and Risk Transfer
A4 - Attitude to Risk
- How would you describe a Risk Averse person?
Somebody who is happier minimising the risk they are exposed to, perhaps by transferring the risk with insurance.
A - Concept of Risk and Risk Transfer
A4 - Attitude to Risk
- Why do many companies carry out Risk Management?
To attempt to accurately evaluate the risk they are exposed to.
B - Risk Management
- What are the key steps of Risk Management?
Identification
Analysis
Control (including risk transfer)
B - Risk Management
- What does Risk Management achieve?
It reduces the potential for loss by identifying and managing hazards.
It gives shareholders a greater degree of confidence in a company’s ability to manage risks.
It provides a disciplined approach to quantifying risks.
B - Risk Management
- What is a defining characteristic of Commercial Risk Management?
It should be a continuous and developing process.
B - Risk Management
- Which body has published a risk management standard?
The Association of Insurance and Risk Managment in Industry and Commerce (AIRMIC)
B - Risk Management
- What are the main reasons for buying insurance? Provide examples.
Compulsory e.g. third party motor insurance.
Financial interest e.g. mortgage lenders may insist on property insurance.
B - Risk Management
B1 - Risk Identification
- What is involved in Risk Identification?
Discovering threats that already exist and potential threats that may exist in the future.
B - Risk Management
B2 - Risk Analysis
- What do Risk Managers use to analyse risks?
Past data
B - Risk Management
B3 - Risk Control
- What are the two levels of Risk Control, and which is preferable?
Reduction
Elimination (preferable, and most effective, but may be costly or impractical)
B - Risk Management
B3 - Risk Control
- What will be considered when controlling risk?
The test of whether the cost of controlling the risk is reasonable compared to the cost of the feared event happening.
B - Risk Management
B3 - Risk Control
- What types of measures can be taken to control risk? Provide examples.
Physical control measures e.g. locks on doors to reduce theft
Financial control measures e.g. transferring risk with insurance
Developing good risk culture e.g. educating employees to reduce risk
B - Risk Management
B3 - Risk Control
- How are Internal Controls categorised?
Detective controls - detect errors that may have occurred
Corrective controls - correct errors that may have occurred
Preventative controls - keep errors from occurring in the first place
B - Risk Management
B3 - Risk Control
- Why do insurers often make clients complete surveys?
To improve the risk to an acceptable standard.
B - Risk Management
B3 - Risk Control
- How can insurers incentivise clients to make worthwhile risk improvements?
By offering premium reductions.
B - Risk Management
B3 - Risk Control
- For what purpose do bodies like the Fire Protection Association and Thatcham Research Centre serve insurers?
They research areas of loss prevention and control.
B - Risk Management
B3A - Fraud and Cyber Crime
- How are insurers managing and mitigating the risk of fraud?
They have created databases for use in the recording and detection of fraudulent activity.
C - Components of Risk
- What are the components of risk?
Uncertainty
Level of Risk
Peril and Hazard
C - Components of Risk
C2 - Level of Risk
- On what basis is the level of risk assessed by insurers?
Frequency
Severity
C - Components of Risk
C2 - Level of Risk
- What are the typical relationships between frequency and severity?
High frequency and low severity e.g. motor insurance, dented bumpers and cracked windscreens.
Low frequency and high severity e.g. aircraft accidents and oil spillages.
C - Components of Risk
C3 - Peril and Hazard
- What is a peril?
Perils give rise to a loss e.g. fire, explosions, lightning, collision, dishonesty
C - Components of Risk
C3 - Peril and Hazard
- What is a hazard?
Hazards influence the effect of the peril e.g. fuel.
C - Components of Risk
C3A - Physical and Moral Hazard
- What is meant by a physical hazard?
Relates to the physical characteristics of the risk and includes any measurable dimension of the risk.