Page 20 - W01TB8_2017-18_[low-res]_F2F_Neat

1/2 W01/March 2017 Award in General Insurance
1
Chapter Introduction

In this chapter, we will look at the concept of risk and how it is perceived, as well as the different
categories of risk. We will also explain how insurance acts as a risk transfer mechanism and introduce
the main classes of insurance.

Key terms
This chapter introduces the following terms and concepts:
Attitude to risk Co-insurance Dual insurance Equitable premiums
Fortuitous events Heinrich Triangle Homogenous exposure Insurable interest

Law of large numbers Peril and hazard Particular and fundamental Pure and speculative risks
risks
Risk management Self-insurance

A The concept of risk

The word ‘risk’ is used in a number of different ways in the world of insurance and we need to look at
each of these in turn. First, though, we will examine the term in its everyday sense and here we find our
first problem: there is no universally recognised definition for the term.

A1 Risk perception

If you were to ask anyone what the term ‘risk’ means to them, you are likely to receive a wide variety of
answers – anything from a business owner being concerned about the possibility of recession to worried
parents concerned about the kinds of danger faced by their children. In fact, the list of risks that we face
is almost endless.
In a personal sense we all take decisions based upon an assessment of risk, most of which are carried Reference copy for CII Face to Face Training
We all take decisions
based upon an out informally. For example, before we leave home in the morning we will often assess the likelihood of
assessment of risk rain and decide whether or not to take an umbrella with us. There may be some data involved in this
decision (a weather forecast, for example) or we may have merely looked out of the window to make our
own judgment about the possibility of rain. This informality is acceptable in ‘low risk’ situations where
the ultimate calamity is, in this example, wet clothes, but in many contexts we need better measurement
tools, especially where the potential for loss is significant.
Risk measurement and the means of attempting to deal with the risks we face are collectively termed
risk management. In a commercial context, this is often a well-defined and scientific process, attempting
to answer questions such as ‘How much will it cost if things go wrong?’ and ‘What are the chances of the
risk becoming a reality?’ We will deal with these issues in greater detail in later chapters. In a personal
sense, most individuals make less precise calculations, often preferring instead to simply protect
against those things that seem capable of inflicting financial disaster, such as fire or theft.
We begin by considering just what is meant by the term ‘risk’.

A2 Definition of risk

Consider the following definitions, each giving a different slant to the term ‘risk’:
• The possibility of an unfortunate occurrence.
• Doubt concerning the outcome of a situation.
• Unpredictability.
• The possibility of loss.
• The chance of gain (such as hoped for benefit from a gamble or investment).