Chapter 2

Chapter 2

1. Risk is uncertainty and unpredictability, very simply. Insurance is available for most risk, so that the consumer is protected. Everyone has a different attitude risk. You have the risk taking, or the 'risk averse' who minimise risk wherever they can

   • Peril = anything that causes loss. Theft, flooding, fire etc
   • Hazard = the high/low chances of the peril happening
   • For example, the peril, theft, could happen because of the hazard, no security.
   • Moral hazard arises from the attitude of people

2. 'Fortuitous event' means to be insurable, the happening of an event must be accidental and not inevitable, unforeseen

3. Homogenous exposures are similar risks. The insurer can forecast the expected frequency and likely extent of loss. This is achieved by using the law of large numbers, a theory that predicts the financial cost of claims

4. Non financial, speculative and fundamental risk cannot be insured. A fundamental risk is one that arises from a cause outside of anyone's control, usually resulting in catastrophic risk

5. There are three key steps in the risk management process: identification, evaluation and control

   • Risk identification involves detailed surveys, discussions and examining records of accidents, accounts and safety hazards
   • When identifying a risk, this info MUST be evaluated. This includes evaluating the potential losses and the insured's ability to respond after serious loss
   • Risk control is divided into physical and financial risk control
     • PHYSICAL RISK CONTROL: The first step is to reduce the level of risk as much as possible. Pre-loss control is minimising or preventing the possibility of a loss occurring, so possibly installing security on a home to reduce the chances of it being burgled. Post-loss control is minimising the effect of the loss after an event has occurred. This can also be referred to as mitigation of the loss
     • FINANCIAL RISK CONTROL: The mechanisms that can be used to control risk may be divided into categories of risk retention (self insurance), risk transfer (passing risk to third parties) or risk elimination

6. SELF INSURANCE... This term means that an individual or company has decided not to use the traditional method of insurance, by setting up a fund themselves to pay for any losses, if they were to arise. It is high frequency, low severity risk

7. CO-INSURANCE... This is a practice in which several insurers can be involved, in which each insurer takes a proportion of the risk