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Chapter 1 Risk and insurance 1/19 Chapter

Question answers 1

1.1 Further risks which would be against public policy to insure might include:
• insurance against loss of income while in prison; or
• insurance against the loss of a driving licence due to drink driving.
The insurer would risk offending public opinion and perhaps, therefore, jeopardise its ability to attract
business.

1.2 Your graph should look like this:
Frequency

Severity
Claims for water leakage have this risk profile as there tends to be a lot of them but the damage they cause is
mainly contained within the room they are situated, with few houses being totally destroyed by water. Other
examples of similar risk profiles could include burglary and storm damage to houses.
1.3 Adverse physical aspects of a risk are easier for an insurer to evaluate and quantify. Behaviour and attitudes
are much more difficult to address (and to change) so it is moral hazard that poses the greater problem.

Sample examination question answers Reference copy for CII Face to Face Training

1. The correct answer is A.
This is because the insurer is providing cover against a large number of similar events.
2. The correct answer is B.
Refer back to section C where we looked at the types of risks which cannot be insured, such as speculative and
fundamental risks.