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Self-test answers i

Chapter 1 self-test answers

1. The risk that the policyholder runs is transferred to the insurer for a known cost (the premium).
2. The main stages of the risk management process are:
• risk identification;
• risk analysis; and
• risk control.
3. Frequency (how often claims occur) and severity (what they cost when they do occur).
4. A peril is that which gives rise to a loss.
5. A hazard is that which influences the operation or effect of the peril either by making a loss more
likely to occur or by increasing the potential size of the loss.
6. Physical hazard relates to the physical characteristics of the risk, whereas moral hazard is related to
the attitudes and behaviour of the people closely related to the risk.
7. Equitable contributions are collected from all those in the pool and valid claims paid out to the few
who suffer loss.
8. Co-insurance refers to risk sharing, either between insurers or between the insurer and the
policyholder.
Between insurers:
• the rating and terms to be applied are agreed among the insurers involved;
• a collective policy is issued;
• each insurer receives a stated proportion of the premium and pays the same proportion of any
losses;
• the leading office is the first named insurer and invariably carries the largest share of the risk;
• the leading office issues the documentation; and Reference copy for CII Face to Face Training
• the policyholder has a direct contractual relationship with each co-insurer.
Between the insurer and the policyholder:
• the policyholder retains a substantial part of each loss either through choice or as a condition of
having the risk accepted by the insurer;
• this might be expressed as ‘co-insurance 25%’, meaning that the policyholder pays 25% of each
claim under the policy.
9. Pure; financial; particular.
10. For a risk to be insurable:
• it should be pure, financial or particular;
• it must be fortuitous or unforeseen;
• there must be insurable interest; and
• it should not be against public policy.