Understanding Risk

Chapter 1 Undertaking Risk Intorduction to Insurance and Risk Management

Learning ObjectivesTo understand the concept of riskTo understand risk vs. UncertaintyTo understand types of riskTo understand classifying pure risksTo understand methods of handling pure risk

Chapter 1 Undertaking Risk Intorduction to Insurance and Risk Management

The Concept of RiskRisk is a condition in which there is a possibility of an adverse deviation from a desired outcome that is expected or hoped forAt its most general level, risk is used to describe any situation where there is uncertainty about what outcome will occur. Life is obviously risky

Chapter 1 Undertaking Risk Intorduction to Insurance and Risk Management

Risk vs. UncertaintyUncertainty is often confused with the riskUncertainty can be perceived as opposite of certainty where you are assure of outcome or what will happenAccordingly, some weights or probabilities can be assigned into risky situations but uncertainty, the psychological reaction to the absence of knowledge lacks this privilege

Chapter 1 Undertaking Risk Intorduction to Insurance and Risk Management

Loss and Chance of LossLoss refers to the Act or instance of losing the detriment or a disadvantage resulting from losingLoss means being without something previously possessed

Chapter 1 Undertaking Risk Intorduction to Insurance and Risk Management

PerilsA peril refers to the cause of loss or the contingency that may cause a loss

Chapter 1 Undertaking Risk Intorduction to Insurance and Risk Management

Hazards1. Physical Hazards – Property Conditions2. Intangible Hazards – Attitudes and Culture

a) Moral Hazard – Fraudb) Moral Hazard – Indifferencec) Societal Hazard – Legal and Cultural

Chapter 1 Undertaking Risk Intorduction to Insurance and Risk Management

Types of RisksFinancial and Non-financial RisksIndividual and Group RisksPure and Speculative Risks› Pure risk situations are those where there is a possibility of

loss or no loss. There is no gain to the individual or the organization

› Speculative risks are those where there is possibility of gain as well as loss

Static and Dynamic RisksQuantifiable and Non-quantifiable Risks

Chapter 1 Undertaking Risk Intorduction to Insurance and Risk Management

Classifying Pure Risks

Chapter 1 Undertaking Risk Intorduction to Insurance and Risk Management

Personal RisksThese are the risks that directly affect the individual’s capability to earn income. Personal risks can be classified into the following types

a) Premature deathb) Old agec) Sickness or disabilityd) unemployment

Chapter 1 Undertaking Risk Intorduction to Insurance and Risk Management

Property RisksThese are the risks to persons in possession of the property being damaged or lost

Chapter 1 Undertaking Risk Intorduction to Insurance and Risk Management

Liability RisksThese are the risks arising out of the intentional or unintentional injury to the persons or damages to their properties through negligence or carelessness

Chapter 1 Undertaking Risk Intorduction to Insurance and Risk Management

Methods of Handling Pure Risk

AvoidanceAvoid the risk to the circumstances which may lead to losses

Loss ControlLoss Prevention – Reduce Loss FrequencyLoss Reduction – Lower Loss Severity

RetentionTo retain in full or part of the risk

Chapter 1 Undertaking Risk Intorduction to Insurance and Risk Management

TransferTo transfer the risk to another individual or organization either by

o Contractual Agreements – insurance, derivatives, diversification strategies etc.

o Corporatizing – converting the sole proprietor/partnership business into a company from an organization

Chapter 1 Undertaking Risk Intorduction to Insurance and Risk Management

SummaryRisk is a condition in which there is a possibility of an adverse deviation from a desired outcome that is expected or hoped forUncertainty refers to a state of mind characterized by doubt, based on the lack of knowledge about what will or what will not happen in the futurePerils refer to the immediate causes of lossHazards are the conditions that increase the severity of loss or the conditions affecting perilsPure risk may be Personal, Property or Liability

Chapter 1 Undertaking Risk Intorduction to Insurance and Risk Management

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