Overview of Risk and Transfer

?

Overview of Risk and Transfer

  • Risk has an element of uncertainty, unpredictability and sometimes danger. 
  • The term risk is used in a number of different ways in the insurance market and can mean the peril or contingency that is insurerd, the thing (or liability) actually insurerd or both the thing insured and the range of contingencies or scope of cover required. 
  • Individuals can be either risk seeking or risk averse.
  • The primary function of insurance is to act as a risk transfer mechanism; that is to transfer a risk from one person, the insured, to another, the insurer. The insured exchanges a large unknown financial risk for a much smaller certain premium. 
1 of 7

Risk Management

  • The primary function of insurance is to act as a risk transfer mechanism, that is to transfer a risk from one person, the policyholder, to another, the insurer. The policyholder exchanges a large unknown financial risk for a much smaller premium.
  • Risk management seeks to identify, analyse and control risk. 
  • Risks can be controlled by physical means (taking measures to decrease the liklihood of a feared event happening) or by financial means (transferring the risk to another by insurance or contract). They can be controlled by improving risk awareness through cultural behaviour and training. 
2 of 7

Components of Risk

  • The insurer will consider the frequency with which a risk occurs, and the severity of it's impact when it does, when deciding how much of a risk can be prudently accepted. 
  • A peril is that which gives rise to a loss and a hazard is that which influences the operation or effect of the peril. Hazard can be physical or moral.
3 of 7

Features of Insurable Risk

  • In order to be insurable, risks must be financial (i.e. their impact be capable of financial measurement) pure, (i.e not speculative) and particular (i.e localised and personal in their impact)
  • An event insured against must be fortuitos or unforeseen, there must be insurable interst and insuring against it must not be against public policy. Generally, too there must be homogeneous exposures. 
4 of 7

Pooling of Risk

  • Pooling of risk is the principle that the losses of the few are paid for by the premiums of the many. 
  • The law or large numbers means that where there are a large number of risks covered, the actual number of losses occuring tends to be very close to what was expected. 
  • Each person contributing to the pool must pay a fair premium based on the amount of risk they bring.
5 of 7

Benefits of Insurance

  • Insurance brings peace of mind for the policyholder and a number of economic benefits to both buisnesses and society at large.
6 of 7

Risk Sharing

  • An insurer can deal with a risk that is too large through either co insurance or reinsurance
7 of 7

Comments

No comments have yet been made

Similar All resources:

See all All resources »See all Insurance resources »