© Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging.

1.2 What is risk? Xchanging Premium Technical Training Programme Module 1 – Introduction to the Business Presenter Date

3 © Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging. What is Risk? The Components of Risk Benefits of Insurance Material Facts Contents

4 © Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging. Define risk – what is it? Group work ………….10 minutes

5 © Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging. What is Risk? · Risk is doubt concerning the outcome of a situation. · Risk is unpredictable. · Risk is the chance of loss. · Risk is the uncertainty of loss.

6 © Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging. The 4 Components of Risk (1) Uncertainty This is doubt about the future. If we know what is going to happen then there is no element of risk.

7 © Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging. (2) Level of Risk There are greater likelihoods of some things happening than others and this affects the level of risk involved. Risk is normally assessed in terms of : Frequency - how often it will happen Severity - how serious it will be if it does happen The 4 Components of Risk

8 © Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging. (2) Level of Risk Risk is normally assessed in terms of: - Frequency - how often it will happen Severity - how serious it will be if it does happen. Freq Severity Freq Severity The 4 Components of Risk

9 © Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging. (3) Peril A peril is what gives rise to the loss e.g. Fire Flood Accidental damage Theft Storm The 4 Components of Risk

10 © Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging. (4) Physical Hazard A peril is what gives rise to the loss and a hazard is what influences the operation of the peril. E.g. Fire is a peril and a thatched roof is a hazard. The 4 Components of Risk ……….Physical Hazard

11 © Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging. (4) Moral Hazard A fast sports car is an example of a physical hazard. The moral hazard arises from the attitude and conduct of people. An example of moral hazard is a driver’s carelessness, which can increase the chance of an accident happening. ……….Moral Hazard The 4 Components of Risk

12 © Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging. Peril or Hazard What is the Peril and Hazard in each of these cases: Risk car will be stolen Peril = theft Hazard = attractive sports car / leaving keys in ignition Risk of a car accident Peril = accidental damage Hazard = weather conditions / driving too fast Risk of injuring others as a result of a car accident Peril = personal accident Hazard = not wearing a seat belt / drink driving ……….in motor insurance

13 © Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging. (1) Uncertainty - This is doubt about the future. If we know what is going to happen then there is no element of risk. (2) Level of Risk - There are greater likelihoods of some things happening than others and this affects the level of risk involved. Risk is normally assessed in terms of : Frequency - how often it will happen Severity - how serious it will be if it does happen. (3) Peril - This relates to the cause of loss. A peril is what gives rise to the loss e.g. fire or theft. (4) Hazard - A hazard is what influences the operation of the peril e.g. a thatched roof (physical) or a careless driver (moral). Physical Moral Recap - The 4 Components of Risk ……this is how a Risk is calculated

14 © Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging. How do people protect themselves against risk? …………….they purchase insurance Insurance is the mechanism used to transfer risk

15 © Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging. Group Exercise Write down what you think are the benefits of insurance to individuals & businesses. Group work ………….10 minutes

16 © Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging. Material Facts Anyone seeking to take out insurance has a duty to state the facts relating to the risk, even if not asked for them. This means that facts that make the risk of loss more likely or more severe, or previous losses of a similar nature, MUST be disclosed to the insurer. Failure to disclose such facts would allow the insurer to avoid paying a claim ….these facts affect the acceptance & premium rating of a risk

17 © Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging. Material Facts Material fact = Thatched roof / storage of flammable liquids / previous arson conviction not spent / use of premises eg restaurant / Fire insurance Motor Insurance Material fact = Age of driver / previous claims history / engine size / garaged over night / average miles per year / modifications Life Insurance Material fact = Dangerous hobbies / Age / Smoker or Non- smoker / medical conditions / occupation

18 © Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging. Recap – Risk & Insurance - Risk has 4 components Uncertainty Level of Risk – Frequency & Severity Peril Hazard – Physical & Moral - Insurance is the mechanism used to transfer risk - Benefits of Insurance Peace of mind Improved cash flow Enterprise is encouraged – new business to start up/existing businesses expand. Loss control is improved It is one of the UK’s most profitable exports. Social benefits – such as encouraging business activity and keeping people in employment. - Material Facts Anyone seeking to take out insurance must disclose all material facts that make the risk of loss more likely or more severe, or previous losses of a similar nature. Failure to do so could void the insurance cover.

19 © Xchanging 2009, no part of this document may be circulated, quoted or reproduced without prior written approval of Xchanging. Break