IF1- Chapter 1

Question 1

Risk Transfer

Answer 1

PH pays premium to insurer in return for insurer accepting unknown cost of the risk

Question 2

Definitions of risk:

Answer 2

Doubt concerning outcome of a situation
Unpredicitability of loss and chance of gain

Question 3

Risk transfer mechanism

Answer 3

Acceptance of unknown risk for an agreed premuim

Question 4

Other meanings to ‘risk’ and example

Answer 4

peril/contingency- EG underwriter quoting for the risk and the range of scope required

Question 5

What are those who carry the risk themselves

Answer 5

Risk seeking

Question 6

Those who minimise the risk

Answer 6

Risk averse

Question 7

what organisation sets standards for risk managemetn

Answer 7

Airmic

Question 8

what is risk control

Answer 8

elimination of reduction of risk

Question 9

What are the different levels of risk control

Answer 9

Physical control- locks on doors
Financial control- transferring risk by taking out insurance
Developing risk culture- training employees in risk management

Question 10

Elements of control

Answer 10

Detective controls- detects errors or irregularities
Corrective controls- corrects errors or irregularities
Preventative controls- keeps errors or irregularities from occuring

Question 11

Components of risk

Answer 11

uncertainty, level of risk, perils and hazards

Question 12

how is the level of risk asessed- example

Answer 12

frequency and severity
high frequency and low severity- motor insurance
Low frequency and high severity- oil spillages

Question 13

what is a peril and hazard

Answer 13

that which gives rise to loss

Question 14

what is a hazard

Answer 14

that which influences the operation or effect of peril- EG smoking cigs in a house

Question 15

What are physical hazards

Answer 15

physical hazards relate to physical characterstics of the risk and include measureable demensions of the risk

Question 16

what are moral hazards

Answer 16

arise from attitude and behaviour of people= careless, dishonesty etc

Question 17

categories of risk

Answer 17

financial and non financial
Pure and speculative
Particular and fundamental

Question 18

definition of financial risk

Answer 18

for a risk to be insurable the outcome must be measured in financial terms

Question 19

non -financial risks

Answer 19

aren’t capable of financial measurement, but it is incidental- risks arising from decisions motivated by other considerations- EG family heirloom

Question 20

pure risk

Answer 20

possibility of a loss but not of gain- best can be achieved is break even- these risks are insurable

Question 21

speculative risks

Answer 21

loss, break even or gain
Insurers don’t insure as they are undertaken voluntarily EG gambling, stock market, national lottery

Question 22

particular risks

Answer 22

localised or personal in their effect- loss is localised or related to an individual

Question 23

Fundamental risks

Answer 23

rise from cause outside control of individuals or groups and effects are widespread- often catastrophic

Question 24

features of insurable risks

Answer 24

the event must be fortituous
insurable interest
insuring the risk must not be against public policy

Question 25

what is a fortituous event

Answer 25

accidental or unexpected

Question 26

non fortituous risk

Answer 26

PH who deliberately damages their vechile for instance

Question 27

insurable interest

Answer 27

legaly recognised financial relationship between insured and the object they are insuring

Question 28

Against public policy

Answer 28

can't be insured- EG attempting to insure against risk of a fine

Question 29

homogenous exposure

Answer 29

using data from various risks to allow insurers to predict expected frequency and likely extent of losses

Question 30

pooling risks

Answer 30

losses of the few are met by the contributions of the many

Question 31

law of large numbers

Answer 31

enables ensurer to predict the final cost of claims in a year

Question 32

equitable premuims

Answer 32

fair contributions to shared pool- responsibility of the underwriter

Question 33

EU gender directive 2011

Answer 33

gender can no longer be used as premuim calculator

Question 34

co-insurance

Answer 34

sharing risk between insurers and risk sharing with the insured risk sharing mechanism

Question 35

reinsurance

Answer 35

insurers come together to form common pool and jointly underwrite particular risks- often catastrophies, terrorism etc

Question 36

benefits of co-insurance

Answer 36

PH deterred from making small claims

Question 37

dual insurance

Answer 37

2 or more policies that cover the same risk- eg travel policy overlaps with home

Question 38

self insurance

Answer 38

individuals or companies carrying the risk themselves- sum will be set aside to fund losses

Question 39

Benefits of buying insurance

Answer 39

improved cash flow expansion of business loss control premuims invested social benefits