What is risk?
The possibility of an unfortunate occurrence
Doubt concerning the outcome of a situation
Unpredictability
The possibility of loss
What is risk transfer in insurance?
When an insurer accepts an unknown future risk from a customer in exchange for a premium.
What are the three other meanings of “risk” in insurance?
The peril or contingency insured
The thing or liability insured
The full scope of cover quoted by an underwriter
What is risk-seeking vs risk-averse behaviour?
Risk-seeking: willing to carry risks themselves
Risk-averse: prefer to minimise or transfer risks
Why is commercial risk management important?
Reduces potential loss
Builds shareholder confidence
Provides a disciplined approach to quantifying risk
What are the 3 key steps in the risk management process?
Risk identification
Risk analysis
Risk control (including risk transfer)
What is risk identification?
Discovering existing and potential future threats.
What is risk analysis?
Using past data to evaluate risks and predict future trends.
What is risk control?
Taking action to reduce, eliminate, or transfer risks.
What are physical control measures?
Actions like installing locks to reduce theft risk.
What are financial control measures?
Transferring risk via insurance or contracts (e.g. hiring a security firm).
What is a good risk culture?
Educating employees or clients to improve risk awareness and reduce risks.
What is MIAFTR?
Motor Insurance Anti-Fraud and Theft Register — helps detect and record fraudulent activity.
What are the components of risk?
Uncertainty
Level of risk (frequency and severity)
Peril
Hazard
What is a physical hazard vs moral hazard?
Physical hazard: measurable characteristics of the risk
Moral hazard: behaviour or attitude of the insured
What are financial vs non-financial risks?
Financial: measurable in money (e.g. theft, damage)
Non-financial: emotional or reputational
What are pure vs speculative risks?
Pure: only loss or no change (insurable)
Speculative: loss, no change, or gain (not insurable)
What are particular vs fundamental risks?
Particular: localised (e.g. car crash, theft)
Fundamental: widespread and uncontrollable (e.g. war, recession)
What are the features of insurable risks?
Fortuitous event
Insurable interest
Not against public policy
Homogeneous exposures
Pooling of risk
Law of large numbers
Equitable premiums
What are equitable premiums?
Fair contributions made by each insured person to their risk pool, based on the level of risk they bring.
What is the EU Gender Directive?
A ruling that insurers cannot use gender to calculate premiums or benefits. It was added to UK law via the Equality Act 2010 (Amendment) Regulations 2012.
Which types of insurance were affected by the EU Gender Directive?
Private medical insurance
Income protection
Annuities
Motor insurance
Life insurance
What is co-insurance (risk sharing between insurers)?
When multiple insurers share a large risk, especially in the London Market.
What is co-insurance (risk sharing with the insured)?
When the insured retains part of the risk, either through an excess, deductible, or a percentage of each loss.
