chapter 1

Question 1

what is risk management?

Answer 1

risk measurement + attempting to deal with the risks we face

Question 2

definition of risk…

Answer 2

possibility of something unfortunate happening
possibility of a loss
unpredictability
chance there might be a gain

Question 3

insurance is…

Answer 3

a risk transfer mechanism
acceptance of an unknown future risk by an insurer for an agreed premium

Question 4

3 other ways “risk” is used in the market place

Answer 4

• peril being insured
• subject matter of insurance eg. the factory/ship
• the thing insured eg. the property

Question 5

2 attitudes to risk

Answer 5

risk adverse & risk seeking

Question 6

why is risk management important?

Answer 6

• reduces the potential for loss
• gives confidence to shareholders
• provides disciplined approach to quantifying risks

Question 7

what is the function of risk management?

Answer 7

• identification (carry out physical examination or survey)
• analysis (examine past data to predict likely future losses)
• control (reduce or eliminate)

Question 8

2 aspects to controlling risks:

Answer 8

physical: eg installing sprinkler systems or alarms
financial: well worded contracts

Question 9

organisations involved in loss prevention

Answer 9

building research establishment (BRE) & Fire Protection Association (FPA)

• provide construction guidelines
• research new construction methods
• provide new reports

Question 10

components of risk

Answer 10

• uncertainty
• levels of risk
• peril and hazard

Question 11

perils and hazards

Answer 11

Perils - gives rise to a loss eg fire or flood

hazard - influences the effect on the peril eg. no having sprinkler systems or fire alarms

Question 12

physical and moral hazards

Answer 12

physical = physical characteristics eg. measurable dimensions of risks

moral hazard - attitude and behaviour of people

Question 13

categories of risk

Answer 13

financial - non financial
pure - speculative
particular - fundamental

Question 14

financial & non financial

Answer 14

financial - must have a cost

non financial - might place value on heirloom which has an intrinsic value but not high market value

Question 15

pure & speculative

Answer 15

pure - possibility of a loss but not of a gain, best you can achieve is a break even

speculative - cant aim to make a gain eg. cant insure against a business failing because of local competition.

Question 16

particular & fundamental

Answer 16

particular - localized (individual/region)

fundamental - affects to large of a group that it is uninsurable. widespread in effect eg. famine in a whole country

Question 17

features of insurable risks:

Answer 17

fortuitous event - accidental or unexpected

insurable interest - must have a financial relationship between you and the object being insured

public policy - cant be insured against getting a fine or breaking the law

homogeneous exposure - historical patterns forecast the expected extent of future losses

Question 18

pooling of risks:

Answer 18

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

different pools for different classes of business

premium must be proportionate to the risks which they are introducing to the pool

Question 19

law of large numbers

Answer 19

large number of similar situations, the actual number of events occurring tends towards the expected number

10000 coin flip > 10 coin flip

Question 20

equitable premiums

Answer 20

for a pooling system to be successful - a number of pools must be set up

one for each main group of risks being underwritten

everyone being insured must be willing to make a fair contribution to the pool

cost covering & profit making

Question 21

reasons why people buy insurance

Answer 21

• attitude to their potential risks
• gives peace of mind
• the extent to which they feel they have a choice about insuring the risk

Question 22

primary functions of insurance

Answer 22

• spreading the risk
• providing a degree of certainty
• transferring the risks

Question 23

secondary functions of insurance

Answer 23

• companies do not have to set aside safety nets
• companies can expand their businesses
• jobs are protected
• losses are reduced in number and size
• benefit the economy
• invisible exports

Question 24

compulsory insurance for private individuals

Answer 24

motor insurance

public liability insurance

ownership of dangerous or wild animals

Question 25

compulsory insurance for professions and businesses

Answer 25

motor insurance employers liability insurance

Question 26

employers liability insurance

Answer 26

Employers’ Liability (Compulsory Insurance) Act 1969 insures employers against their liability to pay compensation to employees who sustain bodily injury or disease, arising out of and in the course of their employment. minimum required limit of 5 million but 10 million is standard Employers’ Liability Tracing Office (ELTO) database - contains all claims after 2011 - mechanism for tracing potential insurance cover

Question 27

motor insurance

Answer 27

Road Traffic Act 1988 it is illegal to cause or permit the use of a vehicle on a public road unless an insurance policy is in force, covering third party property damage and third party bodily injury or death.

Question 28

public liability insurance

Answer 28

riding establishments covers arising claims from using the insured horses - person riding the horse, members of public also covers claims against the person riding the horse against injury to members of the public

Question 29

liability insurance

Answer 29

Dangerous Wild Animals Act 1976 or the Dangerous Dogs Act 1991 the local authority must be satisfied with the adequacy of insurance can be extension to another insurance policy held by the insured/owner. eg. household policy

Question 30

professional indemnity insurance

Answer 30

Solicitors Act 1974 - insurance must indemnify the solicitor against claims for financial loss suffered by clients as a result of the solicitor’s professional negligence. Insurance intermediaries - authorised by FCA

Question 31

claims handling process

Answer 31

insurer ‘experience’ is generally centred on claims handling principles set by the FCA reflect the professional and ethical standards that should guide those who work in insurance

Question 32

CII code of ethics

Answer 32

members are required to: 'treat people fairly regardless of: age, disability, gender reassignment, marriage and civil partnership, pregnancy and maternity, race, religion and belief, sex and sexual orientation'.

Question 33

role of claims personnel

Answer 33

- deal with claims efficiently and fairly - identify claims which are not valid - calculate funds to be set aside for claims - instruct necessary experts - settle claims cost effectively - liaise with colleagues to provide them with data