Risk Management and Insurance-CH 01 One

Risk Management and Insurance
Chapter –1-
Risk and Related Topics
08:38 PM 1
Defining of Risk
Risk: Uncertainty concerning the occurrence of a loss
Loss Exposure: Any situation or circumstance in which a loss is
possible, regardless of whether a loss occurs.
Objective Risk vs. Subjective Risk
• Objective risk also called degree of risk.
• It is defined as the relative variation of actual loss from
expected loss
• It can be statistically calculated using a measure of dispersion, such as
the standard deviation and Cov.
• Subjective risk is defined as uncertainty based on a person’s
mental condition or state of mind
08:38 PM 2
Risk vs. Uncertainty
• Risk is measured by probability but Uncertainty is measured
by the degree of belief.
• Risk is a state of the world but Uncertainty is a state of the
mind.
• Risk is largely objective while uncertainty subjective.
Risk and Probability
• Probabilities are generally assigned to events that are expected
to happen in the future.
• Risk, on the other hand, refers to the variation in the possible
outcomes.
08:38 PM 3
Peril and Hazard
A peril is defined as the cause of the loss
• In an auto accident, the collision is the peril
A hazard is a condition that increases the chance of loss
1. Physical hazards are physical conditions that
increase the chance of loss (icy roads, defective
wiring)
2. Moral hazard is dishonesty or character defects
in an individual, that increase the chance of loss
(faking accidents, inflating claim amounts)
08:38 PM 4
3. Attitudinal Hazard (Morale Hazard) is
carelessness or indifference to a loss, which
increases the frequency or severity of a loss
(leaving keys in an unlocked car)
4. Legal Hazard refers to characteristics of the
legal system or regulatory environment that
increase the chance of loss.
08:38 PM 5
Classification of Risk
I. Financial Vs. Non-Financial Risks
Financial risk results in losses that can be

expressed in financial terms.
Non-financial risk does not have financial

implication
08:38 PM 6
II.Dynamic Vs. Statistic Risks
Dynamic risks: originate from changes in the

overall economy such as: Price level changes,
technological changes, political changes.
• They are less predictable and hence beyond the control of
risk managers.
08:38 PM 7
Static risks: refer to those losses that can
take place even though there were no
changes in the over –all economy.
• They are losses arising from causes other than
changes in the economy.
• Unlike dynamic risks, they are predictable and
could be controlled to some extent by taking
loss prevention measures.
• Example of static risk include theft
08:38 PM 8
III.Fundamental Vs. Particular Risks
Fundamental risks: are essentially group risks
• The conditions which cause them have no relation to
any particular individual.
• Most fundamental risks are economic, political or
social.
Particular risks: are those due to particular
conditions, which obtain in particular causes.
• They affect each individual separately
• Examples include: property losses, death, disability
08:38 PM 9
IV.Pure Vs. Speculative risks
These distinction rests primarily on profit or loss structure of
the underlying situation in which the event occurs.
Pure risks refer to the situation in which only a loss or no loss
would occur.
• Examples include premature death, job-related accidents,
flood, earthquake
Speculative risks, provide favorable or unfavorable
consequences.
• Speculative risk is defined as a situation in which either
profit or loss is possible.
• Examples include foreign exchange risk, gambling
08:38 PM 10
Enterprise risk encompasses all major risks
faced by a business firm, which include:
•Pure risk
•Speculative risk
•Strategic risk
•Operational risk
•Financial risk
08:38 PM 11
Strategic risk: refers to uncertainty regarding the
firm’s financial goals and objectives;
• For example, if a firm enters a new line of business, the line
may be unprofitable.
Financial Risk: refers to the uncertainty of loss because
of adverse changes in commodity prices, interest rates,
foreign exchange rates, and the value of money.
Operational risk: results from the firm’s business
operations.
• For example, a bank that offers online banking services may
incur losses if “hackers” break into the bank’s computer.
08:38 PM 12
Major Personal Risks & Commercial Risks
Personal risks: risks that directly affect an individual
or family.
• Major personal risks that can cause great economic
insecurity include the following
Premature death
Insufficient income during retirement
Poor health
Unemployment
08:38 PM 13
Property risks: involve the possibility of losses
associated with the destruction or theft of property:
• Physical damage to home and personal property from fire,
tornado, or other causes
Direct Loss vs. Indirect Loss
• A direct loss is a financial loss that results from the physical
damage, destruction, or theft of the property, such as fire
damage to a home.
• An indirect (consequential loss) results indirectly from the
occurrence of a direct physical damage or theft loss, such as
the additional living expenses after a fire to a home.
08:38 PM 14
Liability risks involve the possibility of being held
liable for bodily injury or property damage to someone
else.
Commercial Risks
 Is risk a company takes by offering credit with no collateral
 Business firms also face a wide variety of pure risks that can
financially bankrupt the firm if a loss occurs.
These risks include:
(1) property risks (2) liability risks,
(3) loss of business income, and (4) other risks.
08:38 PM 15
Property Risks
• Business firms own valuable business property that
can be damaged or destroyed by numerous perils,
including fires, windstorms, tornadoes, hurricanes,
earthquakes, and other perils.
Liability Risks
Loss of Business Income
• The risk happened when a covered physical damage
loss occurs.
• During the shutdown period, the firm would lose
business income.
08:38 PM 16
End of
Chapter -1-
08:38 PM 17

Risk Management and Insurance-CH 01 One

Uploaded by

Copyright:

Available Formats

Risk Management and Insurance-CH 01 One

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Risk Management and Insurance-CH 01 One

Uploaded by

Copyright:

Available Formats

Risk Management and Insurance

Financial risk results in losses that can be

Non-financial risk does not have financial

Dynamic risks: originate from changes in the

You might also like