Page 22 - W01TB8_2017-18_[low-res]_F2F_Neat

1/4 W01/March 2017 Award in General Insurance
1
Chapter

When it comes to general insurance, risk management is a significantly different concept for individuals
than it is for businesses. Many individuals, when they consider their own financial planning, personal
protection and wealth management issues, tend to adopt a formalised approach. This is often facilitated
by a financial adviser who will carry out a detailed ‘fact-find’ and an equally detailed consideration of the
individual’s income, savings, assets, health and future aspirations. However, the issue of personal
general insurance does not very often follow this detailed pattern. Often it is not bought as the result of
a carefully-made decision that insurance is the best solution to a particular financial problem. Instead, it
is bought because certain elements of cover may be compulsory, such as third-party motor insurance.
Alternatively, it may be that another party has a financial interest in the item to be insured; for example,
if an individual buys a house there is usually a mortgage lender who may insist insurance is taken out on
that property.
Of course, there are areas where there is real choice as to whether to insure or manage the risk in some
other way. However, even here it is highly unlikely that a scientific approach will be taken to assessing
risk. The most dominant factor is likely to be an individual’s risk appetite or an inability to afford
insurance.

Individuals with very substantial physical assets may adopt a more formalised system. These types of
policyholders are often termed ‘high net worth’ individuals and certain insurance products have been
developed specifically for them.

B1 Function of risk management

The focus of good risk management is the identification and treatment of defined risks and it should be
a continuous and developing process embedded in a firm’s strategy. It should address methodically all
the risks surrounding the firm’s current, past and future activities.
Risk management may be defined as:
the identification, analysis and economic control of those risks which can threaten the assets or earning
capacity of an enterprise.
This definition identifies the three steps involved in managing the risk, namely:
The focus of good risk Reference copy for CII Face to Face Training
management is the
identification and • risk identification;
treatment of defined • risk analysis; and
risks
• risk control.
Let us look at these in more detail.
B1A Risk identification

Risk identification involves uncovering the threats to a company that may already exist and the potential
threats that may exist in the future. Not all of these risks will be insurable, but they must all be
managed. For a retail shop, petty theft and shoplifting may be real risks and will need to be managed in
some way or funding set aside to cover their costs. For many conventional risks, an insurer may become
involved in helping to identify existing and potential risks through carrying out a physical examination or
survey. Insurers also play a role in relation to risk control when they provide reports following the survey.
B1B Risk analysis

Risk managers examine past data to evaluate or analyse the risk. For example, they can look at the past
loss patterns of, say, motor accidents involving drivers under the age of 25 years, and so predict what is
likely to happen in the future for drivers who fall into this category. Equally, patterns of reported
accidents in the accident register may be analysed for future trends.

B1C Risk control

If the risk is seen to have the potential for adverse consequences, some course of action should be put
in place to control, reduce or even eliminate it. Elimination is the most effective, but it may be costly or
impractical. For example, if a manufacturer needs to carry out a paint spraying activity that is highly
hazardous, it may be possible to outsource that part of the process and, in doing so, eliminate that
element of the risk. The elimination of risk, or even its reduction, will always be subject to the test of
whether the cost of doing so is reasonable compared to the cost of the feared event happening.