Chapter 41: Pricing and insuring risks

Question 1

Risk classification

Answer 1

A tool for analysing a portfolio of prospective risks by their risk characteristics, so that each subgroup is homogeneous.

Question 2

Once risks have been classified, what does the insurance provider have to decide?

Answer 2

• which risks to take on and keep
• which risks to take on but transfer through reinsurance or alternative risk transfer
• which risks to refuse

Question 3

2 Factors that a company’s risk appetite will be dependent upon

Answer 3

• existing exposure to risk

- culture of the company

Question 4

Why is there a market for risk?

Answer 4

Because different entities have different appetites for risk.
Those with smaller risk appetites transfer to those with a larger risk appetite, in exchange for a payment.

Question 5

What makes a risk insurable?

Answer 5

A risk is insurable if:

• the policyholder has an interest in the risk
• the risk of a financial and reasonably quantifiable nature

Question 6

What are other ideal criteria for a risk to be insurable?

Answer 6

• MORAL HAZARD eliminated as far as possible
• ULTIMATE LIMIT on the liability size
• DATA sufficient for quantifying the risk
• POOLING of similar risks to reduce the variance
• INDEPENDENT risk events
• SMALL PROBABILITY of the risk event