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Chapter 1 Risk and insurance 1/3 Chapter

Whichever we choose, we need to recognise the elements of uncertainty and unpredictability or, in some 1
of the definitions, danger. The term often implies something that we do not want to happen, although –
as we shall see later – not every type of risk is insurable. Just think for a moment, however, about
owning a car. There are many risks associated with this, including:
• the car being stolen in the future;
• a car accident with or without injury to the driver;
• injuring others as a result of a car accident; and
• damage to the car caused by another driver.
Each of these represents a risk as far as the owner is concerned, and in each case it is possible to insure
that risk. This is done by the owner paying a known premium to an insurer in return for the insurer
accepting the future unknown cost of the insured risk. The insurer does this by promising to pay for loss,
damage or liability as defined by the policy terms.
The acceptance of an unknown potential risk by an insurer for an agreed premium is a way of defining
insurance as a risk transfer mechanism. It brings peace of mind to the policyholder because they have
replaced the uncertainty of possible future loss with the certainty of the agreed premium. We consider
this aspect later in the chapter.

A3 Other meanings of the term ‘risk’

Although this section is devoted to risk in its generic sense, there are three other ways in which the term
is used:
• The peril or contingency that is insured – the fire risk, the theft risk etc.
• The thing (or liability) actually being insured. In this context, the ‘risk’ could be a factory or a
manufacturer’s liability to the public.
• When an underwriter quotes for ‘a risk’ an even wider definition is implied. The underwriter will mean
both the thing being insured, such as a property, and the range of contingencies or scope of the cover
required. Reference copy for CII Face to Face Training

A4 Attitude to risk

Each person’s attitude to risk is different and as a result we all respond to risk in different ways. Some
people are willing to carry certain risks themselves and are termed risk-seeking, while others lean more
towards being risk-averse, feeling happier minimising the risk they are exposed to (perhaps by
transferring it using insurance). Very few individuals are in a position to evaluate, with any accuracy, the
risks they are exposed to, although, as we shall now see, many companies attempt to achieve this as
part of their risk management process.

B Risk management

There is a continuing trend towards taking control and developing a formal strategy for managing the
various risks that affect businesses; in fact, the appointment of risk managers in industry and commerce
is now commonplace. There are many associations worldwide devoted to the study and promotion of
knowledge about risk management, including the Association of Insurance and Risk Managers in
Industry and Commerce (AIRMIC), the American Risk and Insurance Association (ARIA), and the Asia-
Pacific Risk and Insurance Association (APRIA).
Risk management is important for a number of reasons:
• It reduces the potential for loss by identifying and managing hazards.
• It gives shareholders a greater degree of confidence in a company’s ability to manage its risks. For
companies quoted on the stock market, there is a legal requirement to identify all significant risks that
the business is exposed to and to explain in the annual report how these are being managed.
• It provides a disciplined approach to quantifying risks.
The decision to transfer risks (for example, by using insurance) is an important final stage in the risk
management process.