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LM1 DB > Chapter 1 - Fundamental principles of insurance > Flashcards

Chapter 1 - Fundamental principles of insurance Flashcards

1
Q

What is the definition of risk?

A

Uncertainty

Unpredictability

Danger

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2
Q

What is a risk transfer mechanism?

A

Owner pays premium to insurer

Insurer covers future unknown cost of the risk

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3
Q

What is risk seeking?

A

Willing to carry the risk themselves

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4
Q

What is risk adverse?

A

Minimising the risk they are exposed to

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5
Q

What do risk managers do?

A

Take control and develop a formal strategy

Manage risks that affect business’

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6
Q

What is the body for risk managers?

A

Association of insurance risk managers

AIRMIC

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7
Q

What are 3 benefits of risk management?

A

Reduces potential for loss

Increases shareholder confidence

Disciplined approach to quantify risk

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8
Q

Is transferring risk the first or last stage in the risk management process?

A

Last

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9
Q

Who usually does financial planning for an individual?

A

Financial advisor

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10
Q

Examples of general insurance that are compulsory?

A

Third party motor

Homeowners mortgage

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11
Q

Why do people not take up insurance?

A

Individuals risk appetite

Inability to afford insurance protection

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12
Q

What is the definition of risk management?

A

Identification, analysis and economic control of risks that can threaten the assets or earning capacity of an enterprise

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13
Q

What is good risk management?

A

Identification and treatment of defined risks

Continuous and developing process embedded in a firms strategy

Covers the firms current, past and further activities

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14
Q

What is identification in risk management?

A

Discovering existing and future threats

Not all insurable but must be managed

Can benefit from insurers advice without coverage e.g., physical examination survey

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15
Q

What is analysis in risk management?

A

Using past data to evaluate/analyse the risk

Insurers using same elements when considering the rating of a risk

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16
Q

What is risk control in risk management?

A

Course of action in place to control, reduce or eliminate the risk

Elimination is the most effective but costly and impractical

Subjective - is it reasonable compared to the cost of the risk happening

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17
Q

What are the two aspects to control a risk?

A

Physical controls e.g., alarm

Financial controls e.g., well-worded contracts

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18
Q

Can insurers impose requirements and recommendations designed to improve a risk after a survey?

A

Yes

Improves risk to acceptable standard

Offers premium reduction as an incentive

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19
Q

What organisations do insurers work with to research areas of loss prevention and control?

A

Building research establishment (BRE)

Fire protection association (FPA)

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20
Q

What type of work do the BRE and FPA undertake?

A

GUIDELINES - providing construction guidelines

MODELS - researching new construction models

PROCESSES - provide reports on new industrial processes

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21
Q

Do insurers have to stay up to date with knowledge of potential clients businesses?

A

Yes

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22
Q

What are the three components of risk?

A

Uncertainty - unable to predict

Level of risk

Peril and hazard

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23
Q

How is risk usually assessed?

A

Frequency - how often

Severity - how serious if it does happen

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24
Q

Why is the frequency/severity profile important to underwriters?

A

Smooth trends support insurers

Forward plan for infrequent large catastrophe-type claims

25
Q

Example of high frequency and low severity

A

Private motor insurance

Many losses for damage of vehicles at low cost

26
Q

Example of low frequency and high severity

A

Aircraft accident

Few losses but high cost damage

27
Q

What is the definition of a peril?

A

Gives risk to a loss e.g., fire, flood, explosion, lightning, collision, dishonesty

28
Q

What is the definition of a hazard?

A

Influences the effect of a peril

29
Q

What are the two types of hazard?

A

Physical hazard

Moral hazard

30
Q

What is a physical hazard?

A

Includes any measurable dimension of the risk

e.g., security protection at a shop, construction of a property, age and type of a car

31
Q

What is a moral hazard?

A

Attitude and behaviour of people

Can be from the insurer themselves

32
Q

Is a financial risk insurable?

A

Yes

33
Q

Is a non-financial risk insurable?

A

No

34
Q

What is a pure risk and is it insurable?

A

Possibility of a loss but not a gain

Insurable

Break-even is the best case scenario

e.g., travelling in an aircraft

35
Q

What is a speculative risk and is it insurable?

A

Aim to gain but could break-even or fail

Not insurable

e.g., lottery

36
Q

What is a particular risk and is it insurable?

A

Localised or personal in cause and effect

Insurable

e.g., storm over a region - not all properties are damaged

37
Q

What is a fundamental risk and is it insurable?

A

Vast scale risks that arise from social, economic, political or natural causes

Uninsurable as lack of appetite from UWs

e.g., risk of war

38
Q

What features must apply for a risk to be insurable?

A

Fortuitous event - accidental or unexpected and not inevitable

Insurable interest - legally recognised financial relationship between the insured and object

Not against public policy - not against what society thinks is the right or moral thing to do

Homogenous exposure - similar risks, historical patterns and trends to forecast future losses aka ‘objective risks’

39
Q

What is pooling of risk?

A

Insurer groups together small risks

Premiums from many insureds -> POOL -> payments to compensate losses of the few

Separate pools for each class of business

40
Q

What is needed for pools to work for an insurer?

A

Premiums must be large enough, in total, to meet the losses in any one year

Cover the operating costs

Profit for the insurer

41
Q

What is the law of large numbers?

A

More insurers in the pool = higher chance of expected outcome

Works for premiums vs claims

42
Q

What is an equitable premium?

A

Fair premiums paid to the pool by insureds

Different elements of risk to calculate equitable premium

43
Q

What are the reasons for buying insurance?

A

Attitude to the potential risk

What price they are prepared to pay

Choice of insuring the risk

44
Q

What are the primary functions of insurance?

A

Spreading the risk

Providing a degree of certainty

Transferring risk

45
Q

What are the secondary functions of insurance?

A

Companies do not have to set aside large sums of money

Companies can be confident to expand business

Jobs protected

Losses reduced - size and number

Benefits economy - insurers invest in funds

‘Invisible’ exports - money into the UK via London market

46
Q

What act made it compulsory for employers in GB to employers liability insurance?

A

Employers’ Liability (Compulsory Insurance) Act 1969

47
Q

Why are some forms on insurance compulsory?

A

Provide funds for compensation

In response to national concerns

Reputation

48
Q

What does the Employers’ Liability (Compulsory Insurance) Act 1969 cover?

A

Pay employees who are injured, diseased etc during their employment

49
Q

What is the minimum required limit of indemnity for employers liability insurance?

A

> £5m is minimum

> £10m is standard in London Market

50
Q

Is there a requirement for employers to display their employers liability certificates?

A

Yes

51
Q

What database contains all new and renewed employers liability policies?

A

Employers’ Liability Tracing Office (ELTO)

52
Q

What is the act that made motor insurance compulsory?

A

Road Traffic Act 1988

53
Q

What act made it compulsory for riding establishments to have public liability insurance?

A

Riding Establishments Act 1970

54
Q

What act made it compulsory for individuals to own wild animals or dangerous dogs?

A

Dangerous Wild Animals Act 1976

Dangerous Dogs Act 1991

55
Q

What act made it compulsory for solicitors to have professional indemnity insurance?

A

Solicitors Act 1974

56
Q

Do insurance intermediaries authorised by the FCA have to have PI insurance?

A

Yes

Appointed representatives and introducer appointed representatives do not require as undertaken by principal that is responsible

57
Q

What is the CII Code of Ethics?

A

Treat customers fairly

58
Q

What is the role of claims personnel?

A

Deal with claims

Claims that are/are not valid

Reserves - calculate funds to set aside

Instruct necessary experts

Settle claims cost effectively

LM1 DB (7 decks)

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