Model answer to question on mitigating risks

[Neha]

Q5 Sep 2020 Paper 1

The question is:

An insurance company writes marine insurance to protect shipping from losses in relation to acts of violence such as war or piracy. Due to increasing political tensions, such actions are becoming more common in one area of the world in which the company has a number of clients. (i) Describe, with specific examples, how the company can use risk control measures to mitigate exposure to the risks arising from these political tensions. [4

The Model answer includes these two points:

Limiting the severity/consequences of a risk that does occur [½]
Insure only up to a certain limit


Could you please help me understand the difference between these two points? I see them as one and the same because essentially they are saying the same thing which is limit the sum assured.

Thanks a lot!

 

[Dar_Shan0209]

Hi Neha,

IMO, limiting the severity would mean capping the maximum claim amount that the insured can claim from the insurer, this could be per loss, or aggregate per year as well. It may also mean introducing excesses or deductibles as well whereby the policyholder would bear some cost before that falls to the insurer.

Insuring up to a limit for me is capping the sum insured as you said, i.e., perhaps in view of higher risk exposure, an insurer might reduce the original sum insured from $1 000 000, say to $500 000.

Hope this helps!

 

[Aman Sehra]

Q5 Sep 2020 Paper 1

The question is:

An insurance company writes marine insurance to protect shipping from losses in relation to acts of violence such as war or piracy. Due to increasing political tensions, such actions are becoming more common in one area of the world in which the company has a number of clients. (i) Describe, with specific examples, how the company can use risk control measures to mitigate exposure to the risks arising from these political tensions. [4

The Model answer includes these two points:

Limiting the severity/consequences of a risk that does occur [½]
Insure only up to a certain limit


Could you please help me understand the difference between these two points? I see them as one and the same because essentially they are saying the same thing which is limit the sum assured.

Thanks a lot!

Hi Neha,

Limiting the severity is all around reducing the effects of a risk that does occur. For example, if there is a ship which is at risk of being targeted by pirates, then by having protocols in place which would reduce the chance of pirates gaining control of the ship (water canons, or armed forces on board the ship), then the severity of the effects of the risk would be lower.

In the course notes, there is mention of a property example, whereby having a sprinkler system in place would mean severity of a fire would be lower, should a fire occur.

Insuring up to a certain limit means the insurer would only cover losses up to a certain amount.

I hope that helps.

Aman
ActEd Tutor