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1/18 W01/March 2017 Award in General Insurance
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Chapter

Key points

The main ideas covered by this chapter can be summarised as follows:
Concept of risk and risk perception
• Risk has an element of uncertainty, unpredictability and sometimes danger.
• The term risk is used in a number of different ways in the insurance market and can mean the peril or contingency
that is insured, the thing (or liability) actually insured or both the thing insured and the range of contingencies or
scope of cover required.
• Individuals can be either risk seeking or risk averse.
• The primary function of insurance is to act as a risk transfer mechanism, that is to transfer a risk from one person,
the policyholder, to another, the insurer. The policyholder exchanges a large unknown financial risk for a much
smaller certain premium.
Risk management
• Risk management seeks to identify, analyse and control risk.
• Risks can be controlled by physical means (taking measures to decrease the likelihood of a feared event
happening) or by financial means (transferring the risk to another by insurance or by contract).

Risks that can be insured and those that cannot
• In order to be insurable, risks must be financial (i.e. their impact be capable of financial measurement), pure (i.e.
not speculative) and particular (i.e. localised and personal in their impact).
• An event insured against must be fortuitous or unforeseen, there must be insurable interest and insuring against it
must not be against public policy. Generally, there must also be homogeneous exposures.
Components of risk
• The insurer will consider the frequency with which a risk occurs, and the severity of its impact when it does, when
deciding how much of a risk can be prudently accepted.
• A peril is that which gives rise to a loss and a hazard is that which influences the operation or effect of the peril.
Hazard can be physical or moral.
Pooling of risk Reference copy for CII Face to Face Training
• Pooling of risk is the principle whereby the losses of the few are paid for by the premiums of the many who, facing
the same risk, suffer no loss.
• The law of large numbers means that where there are a large number of similar situations the actual number of
events occurring tends towards the expected number.
• Each person contributing to the pool must pay a fair premium based on the amount of risk they bring.
Benefits of insurance
• Insurance brings peace of mind for the policyholder and a number of economic benefits to both businesses and
society at large.
Risk sharing
• An insurer can deal with a risk that is too large through either co-insurance or reinsurance.
• One meaning of co-insurance is where the carrying of a risk is shared between two or more insurers. It can also
refer to the case where the policyholder agrees to retain part of the risk themselves.
• Self-insurance is where the policyholder decides to carry the risk themselves by setting aside funding.
• Dual insurance is the existence of two or more policies covering the same risk.

Classes of insurance
• The main types of general insurance are property, pecuniary, motor, liability, marine and aviation insurance, and
combined or packaged policies.
• There is also a number range of general insurance related to the health of a person, such as personal accident,
sickness, medical insurance, payment protection, indemnity and critical illness.