AI Chapter 1

Question 1

What is risk management?

Answer 1

Risk measurement and how we deal with risks

Question 2

Define risk.

Answer 2

Possibility of an unfortunate occurrence

Question 3

What does risk transfer involve?

Answer 3

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

Question 4

What does risk acceptance mean in insurance?

Answer 4

Acceptance of an unknown risk for an agreed premium

Question 5

What is a peril in insurance terms?

Answer 5

Contingency that is insured, such as fire risk or theft

Question 6

What is the role of an underwriter?

Answer 6

Quotes for a ‘risk’ implying a wider definition including both the thing insured and the scope of cover

Question 7

What is the difference between risk-seeking and risk-averse attitudes?

Answer 7

Risk-seeking carries risk themselves; risk-averse minimizes risk by transferring it

Question 8

What organization sets standards for risk management?

Answer 8

Airmic

Question 9

What is risk identification?

Answer 9

Discovering the threats that exist and potential threats in the future

Question 10

What is the purpose of risk analysis?

Answer 10

Examining data to evaluate risk patterns for accurate rating

Question 11

What does risk control aim to achieve?

Answer 11

Elimination or reduction of risk

Question 12

List the elements of controls.

Answer 12

• Detective controls
• Corrective controls
• Preventive controls

Question 13

What is uncertainty in the context of risk?

Answer 13

About the future is the centre of risks

Question 14

How is risk assessed by insurers?

Answer 14

In terms of frequency and severity

Question 15

Define peril and hazard.

Answer 15

• Peril: that which gives rise to a loss
• Hazard: influences the operation or effect of the peril

Question 16

What are physical and moral hazards?

Answer 16

• Physical hazards: relate to measurable dimensions of the risk
• Moral hazards: arise from attitude and behaviour of people

Question 17

What are the two categories of risk?

Answer 17

• Financial risks
• Non-financial risks

Question 18

What distinguishes pure risks from speculative risks?

Answer 18

• Pure risks: possibility of loss but not gain
• Speculative risks: loss, break-even, or gain

Question 19

What are particular and fundamental risks?

Answer 19

• Particular risks: localized in cause and effect
• Fundamental risks: arise from causes outside control, effects are widespread

Question 20

List features of insurable risks.

Answer 20

• Event must be fortuitous
• Insurable interest must be present
• Not against public policy

Question 21

What does ‘fortuitous event’ mean?

Answer 21

Accidental or unexpected event

Question 22

Define insurable interest.

Answer 22

Legally recognized financial relationship between insured and the object they are insuring

Question 23

What is the law of large numbers in insurance?

Answer 23

Allows insurers to predict the final cost of claims based on data from similar risks

Question 24

What is co-insurance?

Answer 24

Sharing risk between insurers and risk sharing with the insured

Question 25

What is reinsurance?

Answer 25

Insurers form a common pool to jointly underwrite particular risks

Question 26

What is dual insurance?

Answer 26

Two or more policies in force covering the same risk

Question 27

What is self-insurance?

Answer 27

Deciding to carry the risk themselves instead of using insurance

Question 28

List reasons for buying insurance.

Answer 28

* Enables risk of financial loss to be transferred * Improved cash flow * Expansion of business * Loss control * Premiums invested * Social benefits