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Chapter 1 Risk and insurance 1/5 Chapter

There are a number of different aspects to controlling risk: 1
• physical control measures, such as putting specific locks on the doors of a factory to reduce the risk of
theft;
• financial control measures, such as transferring the risk by either taking out insurance or by contract
(e.g. arranging for a security firm to accept responsibility for cash when in its control); and
• developing a good risk culture – the key to improving risk awareness and managing risk. This can be
achieved by educating employees or clients on how to avoid or reduce risks.
Depending on what they were designed for, internal controls are usually categorised as detective,
corrective or preventative.
• Detective controls are designed to detect errors or irregularities that may have occurred.
• Corrective controls are designed to correct errors or irregularities that have been detected.
• Preventative controls are designed to keep errors or irregularities from occurring in the first place.
Insurers help in the area of loss prevention and control by imposing requirements and making
recommendations designed to improve the risk, following the completion of a survey. These are
important parts of the surveyor’s report and will either be aimed at improving the risk to an acceptable
standard from the insurer’s point of view, or will offer premium reduction as an incentive for worthwhile
risk improvements.
In a wider context, insurers are involved in researching areas of loss prevention and control. Some of this
work is carried out by professional bodies; for example, in the UK the Fire Protection Association (FPA)
carries out work such as:
• researching new materials and methods of construction and seeing how they behave in a fire;
• providing rules that set standards of construction;
• reporting on new industrial processes and machinery; and
• providing rules for the construction, installation and operation of fire extinguishing appliances, e.g.
sprinkler systems.
A key risk that insurers also need to manage and mitigate is fraud. Read chapter 9, section E, for more Reference copy for CII Face to Face Training
information.

C Categories of risk

It does not follow that, having identified a risk, it will automatically be insurable. It will help our
understanding if we look at different types of risk to identify those that are insurable and those that are
not. The groupings are:

• financial and non-financial;
• pure and speculative; and
• particular and fundamental.

C1 Financial and non-financial risks
Some of the risks that we face are not capable of financial measurement and although they may have a
Some risks are not
financial aspect to them, this is incidental and the real risk arises from decisions and actions motivated capable of financial
by other things. Take, for example, the choice of a marriage partner or our enjoyment of a holiday: we measurement
cannot measure these in financial terms. In the same way, the value we place on a family heirloom may
be far beyond its intrinsic or market value. Although the heirloom could be insured for its intrinsic value,
this would not include the sentimental value we place on it.
For a risk to be insurable, the outcome of adverse events must be capable of measurement in financial
terms. Most general insurance is compensatory in nature, as we shall see later. This means that the
value placed on the loss is not determined in advance. Important exceptions to this general rule are
personal accident and sickness policies. There is no way of valuing the loss of a life or the loss of sight
precisely so these policies are taken out in order to provide pre-agreed amounts in the event of an
accident or sickness. They are known as benefit policies. Similar considerations apply to life assurance
policies.