Risk Management & Insurance Quiz

Risk Management & Insurance

• Risk is the probability of harm, injury, loss, danger or destruction occurring in the future. Losses can be emotional, physical or financial.
• Speculative Risk has three possible outcomes: loss, no change, gain.
• Pure Risk has two possible outcomes: loss, no change.
• Pure Risk Types include:
  • Personal risk - death, disability & unemployment
  • Property risk - direct and indirect losses due to material possessions
  • Liability risk – due to carelessness or negligence
  • Failure of others – performance of service(s)
• Peril is the source of risk, such as death, disability, illness, accident, lawsuit & dishonesty.
• Hazard is an act or condition that increase the probability of a peril or the severity of a loss.
• Hazard Types include:
  • Physical -
  • Morale - a persons’ attitude /carelessness that increase probability of a loss
  • Moral - dishonest behaviour i.e.falsifying insurance application
• Risk is measured by severity and frequency - more severe risks occur less frequently.
• Severity of Risk determines financial implications:
  • Most severe can cause financial ruin
  • Less severe may require financial adjustments that result in a lower standard of living
• Risks faced by individuals include:
  • Loss of income during the period of family obligations (premature death, disability)
  • Loss of wealth (medical expenses, travel medical, long-term care)
• Loss of Income can occur permanently or temporarily:
  • Permanent loss (death of an income earner):
    • Expenses experienced by family: final expenses, continuing expenses
  • Temporary loss (sickness or accident creating disability):
    • Living expenses and obligations continue while income is reduced or eliminated
• Risk Management Strategies include:
  • Primary Strategies:
    • Risk Control
      • Risk Reduction
      • Risk Avoidance
  • Risk Financing
    • Risk Retention
    • Risk Transference
• Risk Avoidance is used when high frequency of risk and severity are critical. Avoiding the activity is the preferred alternative to expensive coverage.
• Risk Reduction is used when low to high frequency of risk and severity are minor, material or critical. It is practiced daily (e.g. hard hats, vehicle maintenance, vaccinations) and may not eliminate risk but reduces it.
• Risk Transfer is used when low or medium frequency of risk and severity are critical or major. It transfers the financial implication to a third party.
• Risk Retention is used when low or medium frequency of risk and severity are minor. It uses deductibles.
• Insurance companies transfer risk from policy owner to insurer.
• Insurers control risk by charging premiums based on the risk the insured represents, classifying risk as:
  • Preferred Risk
  • Standard Risk
  • Sub-standard Risk/Special Risks
  • Rated Policies:
    • Permanent or temporary basis
    • Flat-dollar or % increase (table ratings)
  • Exclusion Riders or Waivers

Insurance Basics

• Insurance can be purchased by individuals, groups, and businesses.
• Insurance agents sell life, disability, health, and investment insurance.
• Coverage is the face amount of a life insurance contract, the benefit from a disability income contract, or the reimbursement amount from a health insurance contract.
• Agents need to carry personal liability insurance (Errors and Omissions Insurance).
• Actual Authority is the authority given to an agent to perform certain tasks.
• Apparent Authority is the implied or suggested authority granted to an agent, even if it wasn't the intention of the principal. Contracts often limit an agent's apparent authority.
• The Principal is bound by the agent's apparent authority because apparent authority can create a misconception that the insurer has approved the action.
• Actual Authority defines what the principal has instructed the agent to do.
• Apparent Authority implies or suggests that the agent has been authorized to do tasks not specifically defined.

Policyowner & Beneficiary

• Irrevocable beneficiary requires written consent to change the beneficiary designation, assign the policy, surrender the policy, or take out a policy loan (except automatic premium loans).
• The life insured, if not the policyowner, has no automatic rights under legislation but may have certain rights in the contract or a separate agreement.
• Beneficiary receives the death benefit, which is not part of the insured's estate and is not subject to creditors' claims.
• Creditors may have a claim on insurance monies to the extent of an outstanding loan.

Claims & Payment

• Claims generally require the following documentation:
  • Proof of the event upon which insurance benefits are payable (e.g. a death certificate)
  • Proof of the age of the person whose life is insured
  • Proof of the claimant's right to receive payment (e.g. a beneficiary designation)

Test your knowledge about risk management concepts and insurance principles in this quiz. It covers various types of risks, hazards, and their implications. Explore pure and speculative risks to enhance your understanding of this critical field.