Risk Management

Risk Management

1. Insurance Law

   • Insurable Interest
     • The person who owns/is being insured is personally involved in the item being insured - you're personally affected by loss should the event occur
   • Indemnity
     • Betterment law - Returning the insured to the position of their insurable interest. The insured must not 'gain' from the purpose of insurance
   • Utmost Good Faith
     • The doctrine of utmost good faith 'The greatest or highest degree of honesty of purpose of sincerity of declaration'
       • Non-Smoker = Not smoked in 12 months - smoking doubles your premium
       • Rejection based on criminal history with fraud etc = 10 year statute of limits
       • Higher risk = Higher premium
     • 'Duty of Disclosure' - disclose everything prior to the entering of the contract. All details to be disclosed are those in which may be material to negotiations
     • Failure to do this may result in avoid contract
   • Subrogation
     • The insured "takes the loss" For the transfer of risk > Betterment Law > You can't take someone to court after receiving an insurance payout. However the insurance company may take the person in the wrong to court to get their money back.

2. Construction of Policy

   • 1: Define risks covered 2: Set out exclusion to the cover 3: Identify conditions of fulfilment 4: Define terms of the insurance and the period of cover

3. Risk = A condition where there is a possibility of an adverse deviation from an expected outcome. A chance of loss, uncertainty, difference between actual and expected results. Indeterminacy = uncertainty. Loss = one outcome is less desirable. Variablility = degree of risk = lower where prediction on chance is made with accuracy

4. Expected value of loss = EV = Probability of loss X size of possible loss

5. Law of Large Numbers = The more observations based on chance, the more likely the actual results will approximate the expected result

6. Perils = immediate loss

   • Natural = Humans have little control over e.g Volcanic erruption
   • Human = Full control over e.g suicide, theft,war
   • Economic= humans can influence

7. Hazards = increases the probability of loss

   • Physical - building near a volcano
   • Intangible - peoples attitudes and cultural conditions. Moral = (what we think) Morale = (Motivation)

8. Risk Management

   • The purpose of this is to identify potential losses/ risks and define a strategy of protection
   • 1: Define objectives - What will the plan achieve 2: Identify loss exposures - Risk profiling -types of loss 3: Evaluate potential loss exposures - Frequency and severity of loss 4: Risk management techniques - loss control 5: Implement and review - decisions based on retain control transfer and avoid risk - Evaluate and review
   • Loss Control
     • Control Risk
       • Risk Avoidance, Loss Prevention, Loss Reduction
     • Risk Financing
       • Active Risk Retention, Passive Risk Retention, Self Insurance, Risk Transference

9. Insurance as a contract

   • Insurance is a contract where the insured agrees to pay a premium to an insurer in order to secure a benefit on the occurrence of an event that is adverse to the interest of the insured.
   • Contract, Uncertainty, Adverse impact - connected to you personally
     • Law of Torts - Consideration, Offer, Acceptance

10. For Insurance to Work

    • Risk Transference
      • To an insurance company who is in a better financial position
    • Losses are shared with an insurance company
      • Law of large numbers
    • Losses = accidental beyond control
      • Loss is not deliberate
    • Indemnification
      • Law of Betterment

11. Adviser Requirements

    • Reasonable basis of Advice
      • PDS
      • FSG
      • Fact Finder
      • SOA
    • Know your client
    • Know your product
    • Types of Advice
      • Personal
        • The adviser has considered one or more of the clients objectives, financial situation and needs
      • General
        • All other advice

12. Legalities

    • Wallis Inquiry Report Founded ASIC & APRA which operate under the FSRA (2001)
      • FSRA (2001) Creates uniform licencing and disclosure. This Act aims to cover Product Disclosure, Licencing, Conduct of Service Providers and Licencing of Financial Markets
        • The FSRA amended the such Acts:
          • Superannuation Industry Supervision Act 1983, Insurance Act 1975, Banking Regulations Act, Insurance Contracts Act 1984, The Retirement Savings Act 1997
      • ASIC
        • ASIC Act (2001) but works under the Corporations Act 2001
        • Maintain and facilitate and improve the performance of the financial system and entities in it
        • Promote confident and informed participation by investors, & consumers in the financial system
        • Administer the law effectively and with minimal procedural requirements
        • Enforce and give effect to the law
        • Receive,process and store efficiently and quickly information that is given to them
        • Make information about companies and other bodies available to the public as soon as practicable
        • Protection of consumers
      • APRA
        • APRA Act 1998
        • Promotes safety and soundness in business behaviour and risk managment
        • Establishes and enforces prudential standards to ensure financial promises made by institutions are met with a stable, efficient and competitive financial system
        • Promotes financial stability by managing risk prudentially (business)
        • Administering the Financial Claims Scheme - arrangements which provide depositors in a failed deposit taking institution and eligible policy holders and other claimants with access to funds to meet insurance claims in the event of the failure of a general insurer
        • Assessing new licence applications
        • Assessing the soundness of supervised institutions
        • Where necessary, carrying out remidiation crisis response and enforcment