CHAPTER 1: Fundamental Principals of Insurance Flashcards
(44 cards)
How can insurance be defined?
As a risk transfer mechanism
What is risk management?
The means of dealing with risks and measuring these risks.
This is expected of the insured to mitigate risks
What are the definitions of ‘risk’?
- A potential problem that can be insured
- The subject matter of insurance
- The entity being insured and the scope of cover required
What are the attitudes to risk?
- Risk-seeking - Happy to carry risks themselves
- Risk Averse - Try to minimise risks
Who are the AIRMIC?
The Association of
The Association of Insurance Risk-managers in Industry and Commerce
What is a Risk manager?
Someone appointed to develop strategies and control risks for a business. A member of the AIRMIC.
Why is Risk Management important?
- It reduces the potential for loss
- It gives Shareholders confidence the Business is being run correctly
- It provides a way of quantifying risk
High net-worth individuals in insurance?
These are more likely to adopt a more formalised approach to their risks and have certain insurance products from them.
What are the processes in Risk Management?
- Risk Identification: A company discovers any possible existing and potential future threats. Not all are insurable but all must be managed. Risks are either avoided, minimised, managed or transferred (insured).
- Risk Analysis: Examine past data to evaluate and analyse the risk. Usually consider the same elements when rating risks. Can use scales for likelihood of risk happening and the impact, these can be multiplied to rank the risks.
- Risk Control: For any risks, they are either controlled, reduced or eliminated. Elimination is usually the most expensive or impractical. The choice of control is subject to the test of whether it is reasonable compared to the actual risk happening.
What are the distinct aspects of controlling a risk?
- Physical Controls (i.e. Sprinklers)
- Financial Controls (i.e. well worded contracts)
Give two examples of organisations providing information about modern changes in insuring areas?
- Building Research Establishment (BRE)
- Fire Protection Association (FPA)
What are the components of Risk?
- Uncertainty
- Level of risk
> Frequency - How often it happens
> Severity - How serious the consequences - Peril and Hazard
In regards to a risk, what is Uncertainty?
- Uncertainty - There is doubt about the future, i.e. not knowing when or if an event will occur.
In regards to a risk, what is the Level of Risk? What are the common combinations?
The relationship between frequency and severity varies from risk to risk
> Frequency - How often it happens
> Severity - How serious the consequences
Can have High frequency + low severity (Ref. Frank E. Bird’s Triangle), Low frequency + high severity
Multiplying a rating for each of these factors makes it quantifiable.
Having a predictable type of risks (no troughs or peaks in claims), then the insurer can prepare for these risks and calculate exposure.
In regards to a risk, what is a Peril and a Hazard?
A peril is something that gives rise to a loss (i.e. a flood, fire, explosions, lightning, collision, dishonesty), the thing being insured
A Hazard is something that influences the operation or effect of the peril. (i.e. a lack of sprinklers would be a hazard), can be physical, moral or both.
What are the categories of Risk?
Groupings:
- Financial and non-Financial
- Pure and Speculative
- Particular and Fundamental
Explain and state what is insurable in regards of financial and non-financial Risks?
Financial risks are any risks where a monetary value can be applied. Non-financial risks may have personal or emotional value, such as heirlooms, and cannot be priced.
Financial - Insurable Non-Financial - not Insurable
Explain and state what is insurable in regards of Pure and Speculative Risks?
A speculative risk is a risk withe the goal of making a gain, but the possibility to break-even or fail. These cannot be insured. (Example is gambling/lottery)
A pure risk is where the best outcome is to break-even, and there’s possibility of a worse situation. These can be insured. (example is travelling in a plane)
Explain and state what is insurable in regards of Fundamental and Particular Risks?
Fundamental risks are risks that occur on such a large scale that they are generally uninsurable, such as war, nuclear risks or recession. However there are exceptions.
Particular risks are localised or personal in their cause and effect, although the cause can be more widespread. The effect is localised or personal, e.g. not all property in a region is damaged. These are insurable.
What is meant by a fortuitous event?
An event that is accidental or unexpected and not inevitable (from the insureds perspective).
A risk must be a fortuitous event.
What is insurable interest?
A financial relationship between the insured and liability or object being insured.
A risk must have insurable interest.
What is public policy?
Public policy are laws and things that society consider the right or moral thing to do.
Can’t insure risks that go against public policy.
What is an objective risk, and what are homogeneous exposures?
An objective risk is where there is sufficient historical data to have an expectation of future losses for that risk.
Homogeneous exposures are risks that are similar, not necessarily the same. Having a large number of prior homogeneous exposures is ideal but not necessary.
State whether the following are insurable or uninsurable risks: Financial - Non-financial Pure - Speculative Particular - Fundamental (generally) Fortuitous event - Deliberate act Insurable interest Public interest Homogeneous exposures - One-offs (generally)
Left side are insurable, right are typically not.
