General Insurance Award Past Paper PDF - 2024-2025

Award in General Insurance W01: 2024–25 Study text RevisionMate Provided as part of an enrolment, RevisionMate offers online services to support your studies and improve your chances of exam success. Access to Revis...

Award in General Insurance W01: 2024–25 Study text RevisionMate Provided as part of an enrolment, RevisionMate offers online services to support your studies and improve your chances of exam success. Access to RevisionMate is only available until 30 April 2025. This includes: Printable PDF and ebook of the study text. Student discussion forum – share common queries and learn with your peers. Examination guide – practise your exam technique. To explore the benefits for yourself, you can access RevisionMate via your MyCII page, using your login details: ciigroup.org/login Updates and amendments The examination syllabus on which this edition is based will be examined from 1 May 2024 to 30 April 2025. Any changes to the exam or syllabus, and any updates to the content of this course, will be posted online so that you have access to the latest information. You will be notified via email when an update has been published. To view updates: 1. Visit www.cii.co.uk/qualifications 2. Select the appropriate qualification 3. Select your unit from the list provided Under ‘Unit updates’, examination changes and the testing position are shown under ‘Qualifications update’; study text updates are shown under ‘Learning solutions update’. Please ensure your email address is current to receive notifications. 2 W01/March 2024 Award in General Insurance © The Chartered Insurance Institute 2024 All rights reserved. Material included in this publication is copyright and may not be reproduced in whole or in part including photocopying or recording, for any purpose without the written permission of the copyright holder. Such written permission must also be obtained before any part of this publication is stored in a retrieval system of any nature. This publication is supplied for study by the original purchaser only and must not be sold, lent, hired or given to anyone else. Every attempt has been made to ensure the accuracy of this publication. However, no liability can be accepted for any loss incurred in any way whatsoever by any person relying solely on the information contained within it. The publication has been produced solely for the purpose of examination and should not be taken as definitive of the legal position. Specific advice should always be obtained before undertaking any investments. Print edition ISBN: 978 1 80002 897 5 Ebook edition ISBN: 978 1 80002 898 2 This edition published in 2024 Reviewer for this edition Michelle Neary BA (Hons), ACII. Acknowledgements The CII would like to thank the Singapore College of Insurance for its assistance with the first edition of this study text, and Malcolm Brown ACII, Chartered Insurer for reviewing it. Typesetting, page make-up and editorial services CII Learning Solutions. Printed and collated in Great Britain. This paper has been manufactured using raw materials harvested from certified sources or controlled wood sources.  3 Using this study text Welcome to the W01: Award in General Insurance study text which is designed to support the W01 syllabus, a copy of which is included in the next section. Please note that in order to create a logical and effective study path, the contents of this study text do not necessarily mirror the order of the syllabus, which forms the basis of the assessment. To assist you in your learning we have followed the syllabus with a table that indicates where each syllabus learning outcome is covered in the study text. These are also listed on the first page of each chapter. Each chapter also has stated learning objectives to help you further assess your progress in understanding the topics covered. Contained within the study text are a number of features which we hope will enhance your study: Activities: reinforce learning through Key points: act as a memory jogger at practical exercises. the end of each chapter. Be aware: draws attention to important Key terms: introduce the key concepts points or areas that may need further and specialist terms covered in each clarification or consideration. chapter. Case studies: short scenarios that will Refer to: Refer to: extracts from other CII study test your understanding of what you texts, which provide valuable information have read in a real life context. on or background to the topic. The sections referred to are available for you to view and download on RevisionMate. Consider this: stimulating thought Reinforce: encourages you to revisit a around points made in the text for which point previously learned in the course to there is no absolute right or wrong embed understanding. answer. Examples: provide practical illustrations Sources/quotations: cast further light of points made in the text. on the subject from industry sources. In-text questions: to test your recall of On the Web: introduce you to other topics. information sources that help to supplement the text. At the end of every chapter there is also a set of self-test questions that you should use to check your knowledge and understanding of what you have just studied. Compare your answers with those given at the back of the book. By referring back to the learning outcomes after you have completed your study of each chapter and attempting the end of chapter self-test questions, you will be able to assess your progress and identify any areas that you may need to revisit. Not all features appear in every study text. Note Website references correct at the time of publication.  5 Examination syllabus Award in General Insurance Objective At the end of this unit, candidates should be able to understand the: basic principles of insurance; main legal principles related to insurance contracts; main regulatory principles related to insurance business; key elements to protect consumers. Summary of learning outcomes Number of questions in the examination* 1. Understand the nature and main features of risk and insurance. 20 2. Know the structure and main features of the insurance market. 22 3. Understand the main legal principles governing insurance contracts. 42 4. Understand the main regulatory and legal principles applicable to the 14 transaction of insurance business. 5. Know key aspects of ethics, corporate governance and internal controls. 2 * The test specification has an in-built element of flexibility. It is designed to be used as a guide for study and is not a statement of actual number of questions that will appear in every exam. However, the number of questions testing each learning outcome will generally be within the range plus or minus 2 of the number indicated. Important notes Method of assessment: 100 multiple choice questions (MCQs). 2 hours are allowed for this examination. This syllabus will be examined from 1 May 2024 until 30 April 2025. This PDF document has been designed to be accessible with screen reader technology. If for accessibility reasons you require this document in an alternative format, please contact us at [email protected] to discuss your needs. Candidates should refer to the CII website for the latest information on changes to law and practice and when they will be examined: 1. Visit www.cii.co.uk/qualifications 2. Select the appropriate qualification 3. Select your unit from the list provided 4. Select qualification update on the right hand side of the page Published February 2024 ©2024 The Chartered Insurance Institute. All rights reserved. W01 6 W01/March 2024 Award in General Insurance 1. Understand the nature and main features 4.3 Understand the importance of combating financial of risk and insurance. crime. 1.1 Explain the concept of risk and risk perception. 4.4 Explain fraud and how it impacts the insurance industry. 1.2 Explain how different risks are categorised. 1.3 Explain the risk management function and process. 5. Know key aspects of ethics, corporate 1.4 Explain the components of risk. governance and internal controls. 1.5 Apply the principles of risk to a given set of 5.1 Explain the functions of the Chartered Insurance circumstances. Institute (CII). 1.6 Explain the need for insurance. 5.2 Explain the importance of the fair treatment of 1.7 Explain what is meant by co-insurance, dual customers and positive customer outcomes. insurance and self-insurance. 5.3 Understand the objectives of ‘fit and proper’ 1.8 Explain the main classes of insurance in outline. requirements and the risks of unsuitability. 5.4 Understand the importance of internal control 2. Know the structure and main features of systems. the insurance market. 2.1 Explain the way in which the insurance market is structured. 2.2 Explain the different types of insurers. 2.3 Explain the unique structure and main features of Lloyd’s. 2.4 Explain the different distribution channels used for the selling of insurance. 2.5 Explain the key roles within the insurance profession. 3. Understand the main legal principles governing insurance contracts. 3.1 Explain the essentials of a valid contract of insurance. 3.2 Explain how contracts of insurance can be terminated. 3.3 Explain the creation of an agency and how it is binding. 3.4 Describe the duties of an agent and the duties of a principal. 3.5 Explain the requirements for insurable interest in insurance contracts. 3.6 Explain how the principles of disclosure and representation apply to contracts of insurance. 3.7 Explain the definition of proximate cause and how it is applied to non-complex claims. 3.8 Explain the principle of indemnity and how it is provided under most insurance contracts. 3.9 Explain how the principle of indemnity can be modified by insurance contracts. 3.10 Explain underinsurance and average. 3.11 Explain the basic principle of contribution and how it applies to the sharing of claim payments in straightforward property cases. 3.12 Explain the principle of subrogation. 4. Understand the main regulatory and legal principles applicable to the transaction of insurance business. 4.1 Explain the importance of the regulation of the insurance industry. 4.2 Understand the importance of establishing and maintaining capital adequacy. Published February 2024 2 of 3 ©2024 The Chartered Insurance Institute. All rights reserved.  7 Reading list Examination guide If you have a current study text enrolment, The following list provides details of further reading which may assist you with your the current examination guide is included studies. and is accessible via Revisionmate (ciigroup.org/login). Details of how to access Note: The examination will test the syllabus alone. Revisionmate are on the first page of your study text. It is recommended that you only The reading list is provided for guidance study from the most recent version of the only and is not in itself the subject of the examination. examination guide. The resources listed here will help you keep up-to-date with developments and Exam technique/study skills provide a wider coverage of syllabus topics. There are many modestly priced guides available in bookshops. You should choose CII study texts one which suits your requirements. Award in General Insurance. London: CII. Coursebook W01. Books (and ebooks) A beginner's guide to the insurance profession. Johnsie Gladney. New Delhi: World Technologies, 2012.* Handbook of insurance. Georges Dionne. New York: Springer, 2013.* Insurance claims. 5th ed. Alison Padfield. Bloomsbury Professional, 2021. Insurance theory and practice. Rob Thoyts. Routledge, 2010.* Insurance law: an introduction. Robert Merkin. London: Routledge, 2007.* Research handbook on international insurance law and regulation. Julian Burling, Kevin Lazarus. London: Edward Elgar Publishing, 2011.* World insurance: the evolution of a global risk network. Peter Borscheid, Niels Viggo Haueter. Oxford: Oxford University Press, 2012.* Periodicals The Journal. London: CII. Six issues a year. Reference materials Concise encyclopedia of insurance terms. Laurence S. Silver, et al. New York: Routledge, 2010.* Dictionary of insurance. C Bennett. 2nd ed. London: Pearson Education, 2004. The insurance manual. Stourbridge, West Midlands: Insurance Publishing & Printing Co. Looseleaf, updated. The insurance manual. Sadler, John. Stourbridge, Worcs: Insurance Publishing & Printing Co. Looseleaf updated annually. Published February 2024 3 of 3 ©2024 The Chartered Insurance Institute. All rights reserved.  9 W01 syllabus quick-reference guide Syllabus learning outcome Study text chapter and section 1. Understand the nature and main features of risk and insurance. 1.1 Explain the concept of risk and risk perception. 1A 1.2 Explain how different risks are categorised. 1B 1.3 Explain the risk management function and process. 1E 1.4 Explain the components of risk. 1D 1.5 Apply the principles of risk to a given set of circumstances. 1A, 1B, 1C, 1D 1.6 Explain the need for insurance. 1E, 1F, 1I 1.7 Explain what is meant by co-insurance, dual insurance and self- 1G, 1H insurance. 1.8 Explain the main classes of insurance in outline. 2I 2. Know the structure and main features of the insurance market. 2.1 Explain the way in which the insurance market is structured. 2A, 2C 2.2 Explain the different types of insurers. 2A, 2B 2.3 Explain the unique structure and main features of Lloyd’s. 2D 2.4 Explain the different distribution channels used for the selling of 2E, 2F, 2G insurance. 2.5 Explain the key roles within the insurance profession. 2H 3. Understand the main legal principles governing insurance contracts. 3.1 Explain the essentials of a valid contract of insurance. 3A, 3B, 3C, 3D, 3E 3.2 Explain how contracts of insurance can be terminated. 3F 3.3 Explain the creation of an agency and how it is binding. 3G 3.4 Describe the duties of an agent and the duties of a principal. 3G, 3H 3.5 Explain the requirements for insurable interest in insurance 4A, 4B, 4C contracts. 3.6 Explain how the principles of disclosure and representation apply 5A, 5B, 5C, 5D, 5E to contracts of insurance. 3.7 Explain the definition of proximate cause and how it is applied to 6A, 6B non-complex claims. 3.8 Explain the principle of indemnity and how it is provided under 7A most insurance contracts. 3.9 Explain how the principle of indemnity can be modified by 7B, 7C, 7D insurance contracts. 3.10 Explain underinsurance and average. 7E 3.11 Explain the basic principle of contribution and how it applies to 8A, 8B, 8C the sharing of claim payments in straightforward property cases. 3.12 Explain the principle of subrogation. 8D, 8E, 8F 4. Understand the main regulatory and legal principles applicable to the transaction of insurance business. 4.1 Explain the importance of the regulation of the insurance 9A, 9B industry. 4.2 Understand the importance of establishing and maintaining 9C capital adequacy. 4.3 Understand the importance of combating financial crime. 9D 10 W01/March 2024 Award in General Insurance Syllabus learning outcome Study text chapter and section 4.4 Explain fraud and how it impacts the insurance industry. 9E 5. Know key aspects of ethics, corporate governance and internal controls. 5.1 Explain the functions of the Chartered Insurance Institute (CII). 10A 5.2 Explain the importance of the fair treatment of customers and 10A positive customer outcomes. 5.3 Understand the objectives of ‘fit and proper’ requirements and 10B the risks of unsuitability. 5.4 Understand the importance of internal control systems. 10C, 10D  11 Exam guidance and accessibility Before you begin the study text, we would encourage you to read about how to approach the exam. Study skills While the text will give you a foundation of facts and viewpoints, your understanding of the issues raised will be richer through adopting a range of study skills. They will also make studying more interesting! We will focus here on the need for active learning in order for you to get the most out of this core text. Active learning is experiential, mindful and engaging Underline or highlight key words and phrases as you read – many of the key words have been highlighted in the text for you, so you can easily spot the sections where key terms arise; boxed text indicates extra or important information that you might want to be aware of. Make notes in the text, attach notes to the pages that you want to go back to – chapter numbers are clearly marked on the margins. Make connections to other CII units – throughout the text you may find ‘refer to’ boxes that tell you the chapters in other books that provide background to, or further information on, the area dealt with in that section of the study text. Take notice of headings and subheadings. Use the clues in the text to engage in some further reading (refer to the syllabus reading list) to increase your knowledge of a particular area and add to your notes – be proactive! Relate what you’re learning to your own work and organisation. Be critical – question what you’re reading and your understanding of it. Five steps to better reading Scan: look at the text quickly – notice the headings (they correlate with the syllabus learning outcomes), pictures, images and key words to get an overall impression. Question: read any questions related to the section you are reading to get a feel for the subjects tackled. Read: in a relaxed way – don’t worry about taking notes first time round, just get a feel for the topics and the style the book is written in. Remember: test your memory by jotting down some notes without looking at the text. Review: read the text again, this time in more depth by taking brief notes and paraphrasing. On the Web Visit here for more detail on study skills: www.open.ac.uk/skillsforstudy. Note: website reference correct at the time of publication. 12 W01/March 2024 Award in General Insurance Exam guidance Answering multiple-choice questions When preparing for the examination, candidates should ensure that they are aware of what typically constitutes each type of product listed in the syllabus and ascertain whether the products with which they come into contact during the normal course of their work deviate from the norm, since questions in the examination test generic product knowledge. Some questions are simply questions of fact, whereas others may be more progressive in nature, requiring reasoning to determine the correct option or, perhaps, being answerable by a process of elimination. Whatever the question, read it carefully to identify what it is really asking. Do not assume that you 'know' what it is asking, even if the question is on a topic about which you feel very confident; answer the question exactly as it is asked. Also, look out for the occasional negative question (Which of the following is not …?). Try to answer all of the questions. While there is no substitute for a good grasp of the subject matter, and you cannot expect to pass the examination purely on guesswork, you do not lose marks for giving a wrong answer! You can find more information on the specific unit in the exam guide (available on the unit page on the CII website and on RevisionMate). On the Web You can find more on preparing for your exam by visiting: https://www.cii.co.uk/learning/ qualifications/assessment-information/before-the-exam/. Note: website reference correct at the time of publication. Accessibility The CII has produced a policy and guidance document on accessibility and reasonable/ special adjustments. The purpose of this is to ensure that you have fair access to CII qualifications and assessments. On the Web The ‘Qualifications accessibility and special circumstances policy and guidance’ document can be found here: https://www.cii.co.uk/media/10129005/cii-qualifications-accessibility- and-special-circumstances-policy-and-guidance.pdf. Note: website reference correct at the time of publication.  13 Introduction Today’s insurance industry reflects the globalised world in which it operates. The expansion of business into other countries and regions carries risks to be insured, and an ever-greater number of insurers are expanding the scope of their business to meet these needs. Insurers can predict losses more accurately with an increasing number of risks insured and, at the same time, minimise the risk of experiencing large losses by spreading their exposures geographically. The Award in General Insurance prepares you for a career in this international industry. It ‘sets the scene’ by introducing the concept of risk and how it is managed, as well as the different categories of risk. It also explains how insurance acts as a risk transfer mechanism and introduce the main classes of insurance. Our examination of the insurance market includes the structure of the market, its main participants and the various professional roles found there. We then go on to look at the main legal principles that apply to insurance. We devote time to contract and agency, good faith, proximate cause, indemnity, contribution and subrogation. Chapter 9 looks at insurance industry regulation, including the role and functions of the International Association of Insurance Supervisors (IAIS), as well as the importance of an insurer’s capital adequacy and its relation to solvency control levels. We also outline the growing importance of combating financial crime, and the role of the Financial Action Task Force (FATF) in developing a strategy to combat money laundering and terrorist financing. The study text then considers the issue of fraud and how insurers manage it. The role and importance of ethics in the insurance industry is also covered, and we look at the core principles of the Chartered Insurance Institute’s Code of Ethics.  15 Contents 1: Risk and insurance A The role of risk in insurance 1/2 B Categories of risk 1/3 C Features of insurable risks 1/5 D Components of risk 1/7 E Insurance as a risk transfer mechanism 1/9 F Pooling of risks 1/12 G Self-insurance 1/13 H Co-insurance and dual insurance 1/13 I Benefits of insurance 1/14 2: The insurance market A Market structure 2/2 B Types of insurer 2/4 C Reinsurance 2/6 D Lloyd’s 2/8 E Intermediaries 2/9 F Distribution channels 2/11 G Influence of the internet and technology 2/13 H Key professional roles 2/14 I Classes of insurance 2/17 3: Contract and agency A Essentials of a valid contract 3/2 B Offer and acceptance 3/3 C Consideration 3/4 D Intention to create legal relations 3/5 E Capacity to contract 3/5 F Cancellation of insurance contracts 3/5 G Agency 3/7 H Terms of business agreements (TOBAs) 3/10 4: Insurable interest A What is insurable interest? 4/2 B When does insurable interest exist? 4/3 C How is insurable interest applied? 4/4 16 W01/March 2024 Award in General Insurance 5: Disclosure and representation A Principle of good faith 5/2 B Duty of disclosure 5/3 C Material information 5/6 D Consequences of non-disclosure and misrepresentation 5/8 E Compulsory insurances 5/10 6: Proximate cause A Definition of proximate cause 6/2 B Modification by policy wordings 6/4 7: Indemnity A What is indemnity? 7/2 B How is indemnity applied? 7/3 C Measuring indemnity 7/5 D Modifying indemnity 7/7 E Limiting factors 7/8 8: Contribution and subrogation A Contribution 8/2 B How does contribution arise? 8/3 C How is contribution applied? 8/4 D Subrogation 8/5 E Insurer’s subrogation rights 8/6 F When subrogation rights don't apply 8/7 9: Insurance regulation A Role of the insurance regulator 9/2 B International Association of Insurance Supervisors (IAIS) 9/6 C Capital adequacy of insurers 9/7 D Combatting financial crime 9/8 E Impact of fraud on the insurance industry 9/12 10: Ethics, corporate governance and internal controls A Ethical standards 10/2 B Corporate governance 10/5 C Internal controls 10/7 D Data protection 10/11  17 Self-test answers i Cases xi Legislation xiii Index xv  Chapter 1 Risk and insurance 1 Contents Syllabus learning outcomes Introduction A The role of risk in insurance 1.1, 1.5 B Categories of risk 1.2, 1.5 C Features of insurable risks 1.5 D Components of risk 1.4, 1.5 E Insurance as a risk transfer mechanism 1.3, 1.6 F Pooling of risks 1.6 G Self-insurance 1.7 H Co-insurance and dual insurance 1.7 I Benefits of insurance 1.6 Key points Question answers Self-test questions Learning objectives After studying this chapter, you should be able to: list the main components of risk; describe how risk is perceived; state the function of risk management; describe the process of risk management; demonstrate how insurance relates to risk; identify the categories into which risks are divided; compare insurable and uninsurable risks; describe the relationship between frequency, severity, risk and insurance; explain the terms peril and hazard as they relate to insurance; describe how insurance operates as a risk transfer mechanism; describe how the common pool operates; outline how insurance benefits policyholders and society; and describe what is meant by co-insurance, dual insurance and self-insurance. Chapter 1 1/2 W01/March 2024 Award in General Insurance Introduction In this chapter, we will look at the concept of risk and how it is perceived, as well as the different categories of risk. We will also explain how insurance acts as a risk transfer mechanism and introduce the main classes of insurance. Key terms This chapter introduces the following terms and concepts: Attitude to risk Co-insurance Dual insurance Equitable premiums Financial risks Fortuitous events Homogeneous Insurable interest exposures Law of large Moral hazard Particular risks Peril numbers Physical hazard Pure risks Risk management Self-insurance A The role of risk in insurance What is meant by 'risk'? The word can be used to refer to the event you are insuring against, such as fire or theft. It can also relate to the 'thing' being insured, or the object of the insurance; for example, the risk may be a car or a house. You may also hear underwriters talk about being 'on risk', which means the item is now being insured by their insurance company. If we concentrate on 'risk' as referring to a potential hazard, we can start to see how much different risks affect us in our everyday lives. All of us meet risks as part of our personal and professional activities. We are each responsible for the risks that we choose to take, although some risks are outside our control. Insurance is available for some of the risks we face, and in an attempt to protect ourselves, we may take out an insurance policy to transfer some of that risk to insurers. A1 Principal definitions of risk It is very difficult to provide a single, comprehensive definition of risk, but the following list gives some possible definitions: Doubt concerning the outcome of a situation. Unpredictability. The possibility of loss. The chance of gain (such as from a bet or investment). Think, for example, about owning a car. There are many risks associated with this, including: the car being stolen in the future; a car accident, possibly with injury to the driver; injuring others as a result of a car accident; damage to the car caused by another driver; the car depreciating in value. Insurance is available in respect of most of these risks and the owner can be protected from the financial impacts of any loss if an appropriate policy has been taken out. The policyholder has no way of knowing in advance how much an incident may cost. What insurance does is to replace the unknown loss (the risk of injury, loss or damage) by a known cost (the premium). The insurer is effectively accepting an unknown potential risk for an agreed premium and this is a way of defining insurance as a risk transfer mechanism. This brings peace of mind to the policyholder because they have replaced the uncertainty of possible future loss with the certainty of the agreed premium. Chapter 1 Risk and insurance 1/3 Chapter 1 Other common uses of risk in the insurance industry The peril that is insured – the fire risk, the theft risk etc. The thing, subject-matter or liability actually being insured – e.g. a car, a home or a manufacturer's liability to the public. When an underwriter quotes for 'a risk', they will mean both the thing being insured, such as a property, and the range of events that may occur or the scope of cover required. Working in the insurance industry, you may hear the term used in different ways. For example, an underwriter might say "I've just seen crime statistics for this area; what is the risk of this house being burgled?" and a commercial underwriter might say "we have received a large risk of three offices to insure." A2 Risk perception Ask anyone what the term 'risk' means to them and you are likely to receive a wide variety of answers! A business owner might be concerned about the possibility of recession. On the other hand, a parent might be worried about the kinds of danger faced by their children. In fact, the list of risks that we face is almost endless. In a personal sense we all take decisions based upon an assessment of risk, most of which are carried out informally. For example, before we leave home in the morning we will often assess the likelihood of rain and decide whether or not to take an umbrella with us. There may be some data involved in this decision (a weather forecast, for example) or we may have merely looked out of the window to make our own judgment about the possibility of rain. This approach is acceptable in ‘low risk’ situations where the ultimate calamity is, in this example, wet clothes, but in many contexts we need better measurement tools, especially where the potential for loss is significant. Example 1.1 One individual's perception of a particular risk can be significantly different from another's. For example, a lot of people will be more concerned about the risk of being involved in an airplane crash than the possible of a serious road traffic accident, even though the likelihood of the latter occurring is significantly higher. This can in part be explained by the element of control of involved in driving, and therefore the perception that the individual has control over the outcome. However, someone that has recently been involved in a motor accident may in fact have an inflated view of the risk of it occurring again, as a result of their own personal experience. Each person's attitude to risk is different, therefore, we all respond to risk in a different way. Some people are willing to carry certain risks themselves and are termed 'risk-seeking' (e.g. someone who is prepared to undertake a bungee jump), while others act very cautiously and are termed 'risk-averse', feeling happier by minimising the risks to which they are exposed. Consider this… Consider your perception of risk. Would you class yourself as 'risk seeking' or 'risk averse'? B Categories of risk Not every type of risk or eventuality is insurable. It will help our understanding if we look at (and contrast) different types of risk to identify those that are insurable and those that are not. The groupings that we will look at are: financial and non-financial risks; pure and speculative risks; and particular and fundamental risks. Chapter 1 1/4 W01/March 2024 Award in General Insurance B1 Financial and non-financial risks For a risk to be insurable, there should be some kind of value attached to the risk in question. The term 'financial risk' relates to the outcome rather than the nature of the risk itself. Loss What is insurable? Accidental damage to a motor car The cost of repairing or replacing the vehicle. Theft of property The item's current market value. This would not include sentimental value because that is not precisely measurable in financial terms. Loss of business profits following a fire This risk is measurable since comparisons can be made to similar trading periods to devise a fair estimate of the loss to be paid by the insurer as compensation. A non-financial risk is one where the outcome is not measurable in monetary terms. No value can be placed on the outcome. Examples Choosing a new house: the risks associated with deciding on a particular house are not easily measurable in financial terms. These risks include style, accommodation, location and personal taste. Deciding on a school for a child: decision-making may include academic performance, social integration and sports performance. Loss of enjoyment of a holiday: there can be no value attached to the enjoyment of an activity or a holiday. There may be financial implications in each example but the outcome is not measurable in financial terms. For this reason, such risks are not insurable. B2 Pure and speculative risks Pure risks are those where there is no possibility of making a profit. The best that can happen is to break even and there is the possibility of a loss (even if a loss is fully covered, there may still be payment of an excess). Pure risk Information Risk of fire This could damage or destroy property or cause an interruption to the running of the business; both risks are measurable in financial terms. Risk of machinery breakdown This could lead to actual damage or business interruption and is measurable in financial terms. Risk of injury to employees at work If such injury is caused by the negligence of the company, a court may award damages and costs. Consider this… Think of two other pure risks which a company might be exposed to. Speculative risks may involve three possible outcomes: loss, break-even or gain. Insurers do not insure speculative risks, since they are undertaken voluntarily, in the hope that there will be a gain. The risk element would be completely removed if the insured knew that the insurer would cover any losses. Obvious examples are playing the Lottery or other forms of gambling. There are also situations such as investing in the stock market or starting up a new business that fall into this category, as well as pricing decisions and other aspects of marketing. With each activity we aim to make a gain, but each carries the possibility of break-even or failure. Consequently, although there are some aspects of business activity that can be insured, this does not include things such as misreading the market or a business failing because of local competition. Chapter 1 Risk and insurance 1/5 Chapter 1 B3 Particular and fundamental risks Particular risks have consequences that affect individuals or local communities. Particular risk Information Factory fire This would cause localised damage to the factory and possibly to its surroundings, but would not affect the whole community. Car collision Damage to the vehicles and any third party liability are localised events affecting relatively few individuals. Theft of personal possessions from a home An event that only affects an individual or family. Fundamental risks are those which arise from a cause outside the control of any one individual or group of individuals and its effects are usually widespread. The loss associated with it is often catastrophic. Such risks may arise out of social, economic, political or natural causes. Examples include economic recession, war, earthquake and famine. However, fundamental risks may have particular consequences for individuals which can be insured. So, although it is not possible to insure against the general effects of economic recession, insurance is available which would cover mortgage payments in the event of the policyholder becoming unemployed. Be aware Earthquake is mentioned here as a fundamental risk, but we need to qualify this. It is correctly classified as fundamental but it is insurable in areas that pose no great likelihood of loss. For instance, there is no problem in obtaining cover in the UK. However, this may not be the case in California or Japan which are subject to a much greater loss potential. Similar considerations apply to storm damage which can be difficult to obtain in parts of the USA adjacent to the Gulf of Mexico, although such cover is freely available in other parts of the world. Consider this… Think about some of the widespread natural disasters, wars and economic recessions of the past 15 years. What might the claims impact have been on the insurance industry? C Features of insurable risks For a risk to be insurable, the following features must be present: The event insured against must be fortuitous There must be insurable interest Insuring the risk must not be against public policy C1 Fortuitous event To be insurable, an occurrence must be a fortuitous event, i.e. accidental or unexpected, not deliberate or inevitable. It must not be within the control of the policyholder. Insurance covers the risk of something happening and not the certainty. Chapter 1 1/6 W01/March 2024 Award in General Insurance Consider this… Two apartments are burgled within the same week. The first apartment was properly locked but the burglar managed to force open a window in order to steal contents from the apartment. The second apartment had keys left in the door and several large windows open, which allowed the burglar to enter the property and steal the contents. Which of these two losses could be described as fortuitous? Which of these losses are likely to be paid by insurers? C2 Insurable interest Insurable interest is the legally recognised financial relationship between the owner of the policy and the object or liability that is being insured. For example, you can insure against the theft of your own car because you will suffer financial loss if it is stolen. Other financial interests are also recognised. Refer to Insurable interest examined in chapter 4. C3 Public policy It is commonly recognised in law that contracts must not be against public policy or go against what society considers to be the right or moral thing to do. Insurers should not, therefore, cover risks that are against public policy. For example, it would be against public policy to insure the risk of incurring a fine for a criminal offence such as speeding. If you were able to insure against these events, it would encourage the public to break the law. There is one other aspect of a risk that insurers will examine when deciding whether it is insurable: the presence of homogeneous exposures. C4 Homogeneous exposures Given a sufficient number of exposures to similar risks, the insurer can forecast the expected frequency and likely extent of losses. This is achieved by using the law of large numbers, a theory that determines that predictions become more accurate as the base of data used increases in size. In the absence of a large number of homogeneous exposures(similar risks), the task is more difficult, as patterns and trends are more difficult to determine. this theory is examined in more detail in Law of large numbers on page 1/12. Be aware Whereas fortuitous loss, insurable interest and not being against public interest are absolute requirements for a risk to be insurable, the concept of homogeneous exposures is an ideal and there are occasions when an insurer will need to use less than fully reliable historical data when deciding what the appropriate premium should be. Example 1.2 A fire insurer receives a proposal for a timber warehouse situated in a busy city. In order to arrive at an appropriate premium for the proposed risk, the insurer considers the likely level of losses based on past experience of a large number of similar risks situated in the same area. Chapter 1 Risk and insurance 1/7 Chapter 1 C5 Summary of insurable and uninsurable risks From what we have seen in this chapter, we can summarise the risks that are generally insurable and those that are generally not insurable as follows: Insurable Uninsurable Financial Non-financial Pure Speculative Particular Fundamental Fortuitous event Deliberate act Insurable interest No insurable interest Not against public policy Against public policy Homogeneous exposures One-offs (generally) D Components of risk Components of risk Uncertainty Level of risk Peril and hazard D1 Uncertainty Uncertainty about the future is at the centre of risk. If we always knew exactly what was going to happen, there wouldn't be any risk. Because we don't we can't be certain of anything. D2 Level of risk Risk is assessed by insurers in terms of frequency (how often something might happen) and severity (how costly it would be if it did happen). Consider this… Imagine a house by a river that is known to flood. No-one knows if the river will overflow again, but because the river is prone to flooding, the risk to the house is increased. Now imagine a second house, 100 metres up a hill from the river. This house is less likely to be at risk from flooding because of its position. But what about severity? Imagine that the house further from the river is much larger. It should be insured for a far greater amount because of the potential severity of loss, damage or destruction. Frequency and severity will both be part of an insurer's risk assessment, but the relationship between them varies. High frequency and low severity An example of high frequency and low severity of loss could be motor insurance, which usually entails a large number of small claims, for things like dented bumpers and cracked windscreens. Low frequency and high severity This describes a small number of events resulting in very high costs, such as aircraft accidents and oil spillages. Chapter 1 1/8 W01/March 2024 Award in General Insurance Figure 1.1: Relationship between frequency and severity A Frequency Severity B The left-hand side of the graph at point 'A' shows the high frequency/low severity claims which, based on the law of large numbers, tend to be predictable. The right-hand side of the graph at point 'B' shows the low frequency/high severity claims, which are difficult to predict owing to their random nature. The relationship between these two dimensions is inverse, so as one increases in prominence the other decreases, and vice versa. An insurer will often base its decisions on how much of a risk it can prudently accept on factors relating to frequency and severity. Insurers have various ways of dealing with a risk that is offered to them where the amount involved exceeds their normal acceptance limits. D3 Peril and hazard This is the final aspect of risk and it relates to the cause of losses. But what is the difference between the two terms? A peril can be defined as that which gives rise to a loss. A hazard can be defined as that which influences the operation of the peril. Example 1.3 Consider someone smoking a cigarette in a house that's insured against fire. Drop the cigarette and it could start a fire. The fire itself is a peril. The act of smoking in the house is the hazard – it affects the likelihood of a fire in the house. Add the fact that the house may be made of wood and the hazard increases. Hazards can be physical or moral, positive or negative. Physical hazards include things like the lack of security in a shop, low standards of property construction and the age of a motor insurance policyholder. Moral hazards include carelessness and viewing insurance fraud as a victimless crime. It can be difficult to separate physical and moral hazards because one often affects the other. For example, a factory that is run carelessly represents a moral hazard, but its badly maintained machinery is a physical hazard. Let's examine these in more detail. D3A Physical hazard Physical hazard relates to the physical characteristics of the risk. For example, the better the standard of building construction the lower the physical hazard for fire and similar risks, as the building will be more resistant to damage. Chapter 1 Risk and insurance 1/9 Chapter 1 By looking at examples of physical hazard in relation to different classes of general insurance, you will fully understand what is meant by this term: Fire insurance Construction of building. Provision of firefighting equipment. Trade processes. Theft insurance Construction of building. Security features. Contents of building. Motor insurance Make, model and condition of vehicle. Place where vehicle is usually kept. Typical usual use of vehicle. Age of proposer. Employers' liability insurance Industrial processes in a factory. Guarding of machinery. Personal accident and sickness Proposer's health record and occupation. insurance Any dangerous hobbies the proposer has. D3B Moral hazard Moral hazard relates to the human attitudes and behaviours which may influence the outcome of the risk, rather than what is being insured. In insurance, the prime source of moral hazard is the insured person. However, the conduct of the policyholder's employees and society in general have an ever-increasing influence in the assessment of moral hazard. It is sometimes difficult to distinguish between physical and moral hazard. Very often, when a poor physical hazard exists, it is only the result of a poor moral hazard at an earlier stage. For example, an untidy or dangerous workplace (poor physical hazard) may be as a result of poor housekeeping and supervision (poor moral hazard). Another example of an overlap between physical and moral hazard could be that of skiing under a travel policy. The main risk is suffering injury, which would relate to the physical risk of the activity, however, it may be a moral hazard to decide to go skiing off piste, ignoring danger signs. Question 1.1 Which type of hazard tends to be harder for insurers to assess when deciding on the terms for a new risk – physical or moral? a. Physical hazard. □ b. Moral hazard. □ E Insurance as a risk transfer mechanism 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). Transferring the risk to an insurer does not in itself prevent losses from occurring, but it provides us with a form of financial security and peace of mind. The large unknown financial risk that an individual faces, such as their home burning down, is transferred to the insurer and replaced by the much smaller certain cost of the premium. Let's now examine how the decision to insure is made. Chapter 1 1/10 W01/March 2024 Award in General Insurance E1 Risk management Risk measurement and how we attempt to deal with the risks we face are collectively termed risk management. In a personal sense, most individuals manage risk by protecting against those things that seem capable of inflicting financial disaster, such as fire or theft. Often, insurance is bought because certain aspects of cover are 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 with a mortgage, a mortgage lender may insist insurance is taken out on the property. Commercial risk management Commercial organisations often take a much more analytical view when deciding what to insure, attempting to answer questions such as 'How much will it cost if things go wrong?' and 'What are the chances of the risk becoming a reality?' 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. In fact, the appointment of risk managers in industry and commerce is now commonplace. Commercial risk management is important for a number of reasons: It reduces the potential for loss by identifying and managing hazards. It gives shareholders a greater degree of confidence in a company's ability to manage its risks. It provides a disciplined approach to quantifying risks. The concept of risk management has been of increasing relevance and importance in recent years. Risk management can enhance business models by operating as an integral part of established and future processes. There are many associations worldwide devoted to the study and promotion of knowledge about risk management, including the Association of Insurance and Risk Managers in Industry and Commerce (AIRMIC, www.airmic.com), the American Risk and Insurance Association (ARIA, www.aria.org), and the Asia-Pacific Risk and Insurance Association (APRIA, www.apria.org). In order to make informed decisions about the risks that a business faces, there are three key steps in the risk management process: risk identification; risk analysis; and risk control (including the possibility of risk transfer). Let's look at these in more detail. E1A 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. Risk identification techniques involve: detailed surveys of premises, properties and/or processes; on-site discussions; examination of records of accidents etc.; examination of accounts; and consideration of health and safety hazards. Chapter 1 Risk and insurance 1/11 Chapter 1 E1B Risk analysis Risk managers then evaluate risk data in terms of frequency and severity. 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. E1C Risk control If the risk is seen to have the potential for adverse consequences, action should be taken 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. Telematics is a good example of this – it provides data that measures driving behaviour to help insurers give an accurate premium. Instead of solely basing the cost of a policy on application details such as the driver's age, car type and driving experience, telematics can offer a more tailored price by taking speed, braking and driving habits into account. Risk control may be divided into physical risk control and financial risk control. Physical risk control Financial risk control This is concerned with the physical steps which can be The financial mechanisms which can be used to control taken to control risk. The first step is to reduce the level risk may be divided into the categories of: of risk as much as possible. Physical risk control may risk retention, in the form of self-insurance, first take the form of: loss covers, deductibles, excesses etc.; pre-loss control, minimising or preventing the risk transfer, by transferring risk to other third possibility of a loss occurring, e.g. the installation of parties or by purchasing insurance; and a high-tech alarm system; and/or risk elimination – the ultimate form of risk control post-loss control, minimising the effect of the loss but it is rarely practicable for, say, a factory owner to once an event has occurred (this can also be abandon a potentially risky process if this is central referred to as 'mitigation of the loss'), e.g. to the manufacture of a profitable end-product. preventing a leak from causing further damage by Eliminating a risk entirely is very difficult in practice. turning off the water supply. Developing a good risk culture is 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 should detect errors or irregularities that may have occurred. Corrective controls should correct errors or irregularities that have been detected. Preventative controls should 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. A key risk that insurers also need to manage and mitigate is fraud. This is covered further in Impact of fraud on the insurance industry on page 9/12. Chapter 1 1/12 W01/March 2024 Award in General Insurance F Pooling of risks The basic principle of insurance is that the losses of the few are met by the contributions of the many. An insurance company gathers together relatively small sums of money from people who want to be protected from similar kinds of perils. The insurer sets itself up to operate a common pool. In fact, insurers operate a number of separate pools for different classes of insurance. Contributions, in the form of premiums from all those insured, go into this pool. Out of the pool come payments to compensate the losses of the few. These contributions, or premiums, must be large enough in total to meet the losses in any one year and, in addition, must cover the costs of operating the pool and provide an element of profit for the insurer. The insurer endeavours to make sure that the premium which each insured pays is fair in relation to the risk that they introduce to the pool. F1 Law of large numbers Applying the law of large numbers to insurance enables the insurer to predict the final cost of claims in any one year fairly confidently. This is because insurers provide cover for a large number of similar risks and the final number of actual loss events (claims) tends to be very close to the expected number. This enables the insurer to calculate likely losses and thus charge a fixed premium so that the policyholder knows the costs for the year, irrespective of the number or size of their own particular losses. Nevertheless, competitive pressures and the business imperative to grow or defend market share can affect the level of premium requirement put forward to the policyholder. Question 1.2 By operating a pooling of risk system, the law of large numbers assists insurers in making reliable: a. Claim payment predictions. □ b. Investment return predictions. □ c. New business predictions. □ d. Premium income predictions. □ F2 Equitable premiums To operate a pooling system successfully, a number of pools must be set up, one for each main group of risks. This could be an individual pool for motor insurance and another for household insurance, for example. Each person wishing to join the pool must be prepared to make an equitable (fair) contribution to that pool. When deciding on an equitable premium (contribution), insurers take into account the different elements of risk brought to the pool by each of the policyholders. The correct assessment will ensure that a fair premium is charged, and a fair profit can be made. This is the task of an underwriter when considering an individual risk. Consider this… Think of a policyholder who owns a large mansion and another who owns a small apartment. Both require home insurance, though it is likely that the mansion will be considered a larger risk than the apartment, so the policyholder will be required to pay more premium into the common pool. Chapter 1 Risk and insurance 1/13 Chapter 1 G Self-insurance The term self-insurance means that an individual or company has decided not to use insurance as the risk transfer mechanism, but to carry the risk themselves by setting up a fund from which any losses can be paid. For example, a shopkeeper might consider that damage to their shopfronts is a risk they are prepared to carry themselves, so set aside a regular sum each month to fund this eventuality. The term can also be used when referring to excesses or deductibles on a policy, i.e. the policyholder has self-insured for, say, the first US$150 of any loss. This could also take the form of a self-insured retention, which is an amount the policyholder will retain (or pay) before insurers will pay for any claims. Be aware Self-insurance is not the same as not bothering to insure, which is non-insurance. Self-insurance is a concept that is most suited to high frequency, low severity risks, where the purchase of insurance to fund a succession of low value losses would become little more than a dollar-swapping exercise. The individual or company concerned could consider increasing the ‘ticket price’ of the product or service sold to create a contingency fund to cover such eventualities. H Co-insurance and dual insurance H1 Co-insurance Co-insurance is fairly usual practice for insurers where no one insurer wishes to take on board all of the risk being offered. Several insurers can be involved, each taking a stated proportion of the risk, each receiving that proportion of the premium and each being responsible for that proportion of any claim made. Generally, in practice, one insurer administers the co-insurance arrangement. This insurer is usually the one with the largest proportion of the cover and is called the leading office. When a loss occurs each co-insurer will settle its share of the claim directly to the policyholder or alternatively each co-insurer will forward its claim payment to the leading office for onward transmission of a consolidated payment to the policyholder. The policyholder has a direct relationship with each insurer for their share of the risk. Example 1.4 A large chemical manufacturer wants to insure its research and development complex for US$350 million. None of the insurers approached wishes to assume a risk of that size so ten insurers each agreed to accept US$35 million. Note that acceptances do not necessarily have to be equal and, in any case, some insurers may decide they need reinsurance (see Reinsurance on page 2/6) to protect their share of the risk. The expression 'co-insurance' can also be extended to include situations where the policyholder's excess or deductible is quantified, not as a fixed sum but as a percentage. For example, the policyholder (referred to as 'the insured' in the following diagram) is responsible for 10% of all losses which may, or may not, be subject to a specified maximum limit. Be aware The terms self-insurance and co-insurance have different meanings for different circumstances. Make sure you are clear on these differences. Chapter 1 1/14 W01/March 2024 Award in General Insurance Self insurance Co-insurance Transferred Transferred to insurers Insurer Insurer to insurers Whole risk retained A B Self-insured Insured’s retention portion as a % The individual or The insured Risk is shared The insured is company has retains part of the between several responsible for a decided to retain loss – often insurers – each percentage of the whole risk referred to as a taking a stated losses – called itself ‘self-insured proportion an excess or retention’ deductible H2 Dual insurance Essentially, the term dual insurance is used when there are two or more policies in force which cover the same risk. The policyholder may have done this accidentally; for example, they may have bought a travel policy for their holiday that includes cover for personal effects that are already covered under the 'all risks' section of their household contents policy. There are, however, occasions when dual insurance is deliberate. Take, as an example, goods that are stored in a warehouse; the owner may have a policy covering all the goods that they own, regardless of where they are kept. The warehouse keeper may have a policy covering goods that are in their custody or control. We can see straight away that each is a legitimate insurance. However, there is no exact duplication, although the goods appear to be covered twice. Special rules apply to such situations, and in chapter 8 we will look more closely at what happens when there are two or more policies covering the same risk. I Benefits of insurance Insurance brings many benefits to policyholders and to society as a whole. We have already mentioned the peace of mind that it can provide, and how it enables the risk of financial loss to be transferred. A number of other benefits are outlined below: Cash flow Social Expansion benefits of business Benefits of insurance Premiums Loss invested control Chapter 1 Risk and insurance 1/15 Chapter 1 Let's examine these points in more detail: Improved cash flow Money does not have to be kept in reserve for potential losses, which frees up capital and therefore improves cash flow. Expansion of business Enterprise is encouraged, since insurance makes it easier for new businesses to start or for existing businesses to invest, innovate and expand. Loss control Insurers have an interest in reducing the frequency and severity of losses, not only to enhance their own profitability but also to contribute to a general reduction in the economic waste which follows a loss. Also, the policyholder suffers less business interruption and consequential inconvenience as the effects of the loss are minimised or ideally, do not occur at all. Premiums invested Premiums can be invested to earn interest. Money is held until claims have to be paid. This creates a 'premium reserve'. Social benefits Insurance has many social benefits, such as encouraging business activity and helping to keep people in employment. Most commercial insurance policies will offer a business interruption element which covers wages and the loss of trading income during a period of business interruption and recovery. Chapter 1 1/16 W01/March 2024 Award in General Insurance Key points The main ideas covered by this chapter can be summarised as follows: The role of risk in insurance 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 future event that is insured against, the thing (or liability) actually insured, or both of these. Individuals can be either risk seeking or risk averse. Categories of risk The types of risk that are insurable in general insurance can be summarised as: – financial risks; – pure risks; and – particular risks. Not all risks are insurable. These can be summarised as: – non-financial risks; – speculative risks; and – fundamental risks. Features of insurable risks 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. Insurance as a risk transfer mechanism 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 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). Pooling of risks Pooling of risk is the principle that the losses of the few are paid for by the premiums of the many. The law of large numbers means that where there are a large number of risks covered, the actual number of losses occurring tends to be very close to what was expected. Each person contributing to the pool must pay a fair premium based on the amount of risk they bring. Self-insurance; co-insurance and dual insurance Self-insurance is where the policyholder decides to carry the risk themselves by setting aside funding. Chapter 1 Risk and insurance 1/17 Chapter 1 Key points An insurer can deal with a risk that is too large through either co-insurance or reinsurance. Co-insurance often describes where the carrying of a risk is shared between two or more insurers. Co-insurance can also refer to cases where the policyholder agrees to retain part of the risk themselves and insure the remainder of the risk. Dual insurance is the existence of two or more policies covering the same risk. Benefits of insurance Insurance brings peace of mind for the policyholder and a number of economic benefits to both businesses and society at large. Benefits to insurers include improving cash flow, enabling business expansion, facilitating loss control and allowing them to invest premiums. Benefits to society include encouraging business activity and helping to keep people in employment. Chapter 1 1/18 W01/March 2024 Award in General Insurance Question answers 1.1 b. Moral hazard. 1.2 a. Claim payment predictions.  Chapter 1 Risk and insurance 1/19 Chapter 1 Self-test questions 1. For a risk to be insurable it must be: a. financial, speculative and particular. □ b. fundamental, pure and particular. □ c. financial, pure and particular. □ d. fundamental, financial and pure. □ 2. Homogeneous exposures are: a. similar risks which help set premium levels. □ b. identical risks which help set premium levels. □ c. identical risks which help determine a pattern. □ d. similar risks which help determine a pattern. □ 3. Sasha is starting a mobile hairdressing business. She is concerned about the threat of local competition. She should be aware that this is not insurable as it is a: a. pure risk. □ b. speculative risk. □ c. financial risk. □ d. non-financial risk. □ 4. What are the three steps involved in managing risks? a. Risk identification, risk monitoring and risk avoidance. □ b. Risk identification, risk analysis and risk control. □ c. Risk highlighting, risk analysis and risk monitoring. □ d. Risk highlighting, risk analysis and risk avoidance. □ 5. An intruder alarm in a workshop is an example of a: a. physical control measure. □ b. preventative control measure. □ c. material control measure. □ d. financial control measure. □ 6. A pool of insurance premiums must be large enough to meet the losses in any one year plus the: a. costs of operating the pool and an element of profit. □ b. costs of operating the pool. □ c. anticipated losses in the following year. □ d. costs of operating the pool and an element of contingency. □ Chapter 1 1/20 W01/March 2024 Award in General Insurance 7. XYZ Home Insurance has issued a collective co-insurance policy with two other insurance firms for a local construction company. It is true to say that: a. the construction company only has a direct contractual relationship with XYZ. □ b. XYZ decides the terms and rating to be applied. □ c. XYZ is solely responsible for settling any claims made. □ d. the construction company has a direct contractual relationship with each of □ the insurers. 8. A taxi firm that regularly puts an amount of money aside to cover the costs of accidental damage is an example of: a. co-insurance. □ b. dual insurance. □ c. self-insurance. □ d. reinsurance. □ You will find the answers at the back of the book  2 Chapter 2 The insurance market Contents Syllabus learning outcomes Introduction A Market structure 2.1, 2.2 B Types of insurer 2.2 C Reinsurance 2.1 D Lloyd’s 2.3 E Intermediaries 2.4 F Distribution channels 2.4 G Influence of the internet and technology 2.4 H Key professional roles 2.5 I Classes of insurance 1.8 Key points Question answers Self-test questions Learning objectives After studying this chapter, you should be able to: discuss the operation and structure of the insurance market; outline the features of different types of insurance company; describe the structure of the global and regional market including the unique structure of Lloyd’s; outline the different distribution channels used for buying and selling insurance; describe the basic purpose of reinsurance; describe the functions of underwriters, claims personnel, loss adjusters, loss assessors, actuaries, risk managers and compliance officers; and outline the main classes of insurance.  2/2 W01/March 2024 Award in General Insurance Introduction Today's insurance market is truly international, as we continuously try to spread risk and, Chapter 2 consequently, the losses faced by insurers, across countries and regions. Many insurers also see expanding business into other countries as vital to their commercial growth. All these movements are in line with the principle that insurers can predict losses more accurately with an increasing number of risks insured and, at the same time, minimise the risk of experiencing large losses by spreading their exposures geographically. Key terms This chapter introduces the following terms and concepts: Appointed Captive insurers Claims staff Distribution channels representative (AR) Insurance agent Insurance broker Intermediaries Lloyd’s Loss adjuster Loss assessor Mutual companies Price comparison websites Reinsurance Underwriter A Market structure The insurance market is made up of three principal groups of people: buyers; intermediaries (including brokers); and sellers (insurers and reinsurers). The interaction between the main three groups is easily illustrated by the diagram shown in figure 2.1. Figure 2.1: Information flow Reinsurance Insurance Buyers Intermediaries Aggregators Insurers Reinsurers Consider this… Think of another market, such as the motor car market. Motor dealers buy from manufacturers and sell to sub-agents, who then sell cars to individuals or companies. How do they compete with one another? Is this the same way in which insurers compete with one another? What are the differences and what are the similarities? A1 Buyers Those who buy insurance are known as proposers during the negotiation period leading up to the conclusion of the contract of insurance. Chapter 2 The insurance market 2/3 At the point when the insurance comes into force (referred to as the inception of the policy), the buyer is known as the insured or the policyholder. Buyers of insurance may be divided into the following five types: Chapter 2 Private individuals. Commercial customers. Public bodies. Charities, associations and clubs. Sole traders and partnerships. A1A Private individuals Many people buy insurance in a private capacity, ranging from a life insurance policy which pays out on death of the policyholder through to pet insurance designed to pay out if the family cat or dog is in an accident or becomes ill. It is probably fair to say, however, that most expenditure on insurance is spent on motor insurance and household buildings and contents insurance. A1B Commercial customers In commerce and industry, large amounts of money are spent on a wide variety of insurance products. Often, specially designed insurance packages will be tailored to meet a commercial customer's insurance needs. A1C Public bodies Many public bodies, including local authorities and schools, are major buyers of insurance. In some cases, they may be large enough to have set up their own insurance fund to insure some risks they face, while turning to the insurance market to cover other much larger risks. A1D Charities, associations and clubs There are many charities, associations and clubs and all will have some insurance needs. Whether it is the local golf or swimming club, the management team or organisers will usually buy insurance cover for liability risks and damage to owned property. They may also act for members by arranging group covers or schemes. Consider this… Can you think of a club or an association that you or someone you know belongs to? Why might they need insurance? A1E Sole traders and partnerships Sole traders are found in many areas of life – they might be plumbers, builders or any one of a multi