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Department Of Accounting And Finance

Risk management individual assignment

NAME;DAWIT YOHANNES

ID;BEE/2550/11

SECTION:1

Submitted date; may20, 2020

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Table of contents PAGE

1. Objective vs. subjective---------------------------------------3

2. Risk vs. uncertainty---------------------------------------------3
3. The difference between Risk
Peril and hazard-------------------------------------------------4
4. Types of hazard--------------------------------------------------4
5. Pure vs speculative---------------------------------------------5
6. Personal property and liability risk--------------------------6
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1. Objective vs. subjective

Objective- it also called degree of risk and they are measurable risk
- Relative variation between actual loss with losses estimated

- The variation is exist in nature and it is the same for all person facing the same situation

Example- usual complaints like headache, pain, nightmare,,,

Subjective-risks are non-measurable risk

- assessment of uncertainty based on a person mental state or opinion
- In this risk it depends on the person psychological beliefs or two person In the same
situation may have different perception

Example- unusual events like sleep walking, sleep talking and others.

2.Risk vs. uncertainty

- uncertainty is more of subjective but risk is determined by objective risk
- Risk is measured by probability; uncertainty is measured by degree of belief.
- Risk exists whether or not a person is aware of it. It is a state of the world. Uncertainty,
however, exists only with awareness; it is a state of mind.

For example, the risk of cancer from cigarette smoking existed the moment cigarettes are
produced. However, the uncertainty did not arise until the relationship between cigarette
smoking and cancer is established through scientific and empirical research.

- in the risk the distribution of the outcome in a group of instances is known either
through calculation a priori or from statistics of past experience; while in the case of
uncertainty this is not true, the reason being in general that it is impossible to form a
group of instances, because the situation dealt with is in a high degree unique.
- risk and uncertainty may have some relationship. The presence and absence of
uncertain does not necessarily mean the presence and absence of risk respectively. The
following four situations underscore the difference between risk and uncertainty:
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1. Both risk and uncertainty are present

E.g. a person may be exposed to risk of disability and may experience uncertainty

2. Both risk and uncertainty are absent

E.g. Sailors at present know that the earth is not flat.

- There is no possibility of falling off the edge of the earth.

3. Risk is present and uncertainty absent

E.g. there is a possibility of loss due to interruption of operation by fire. There may be no
uncertainty because of failure to recognize the existence of such risk, understatement of
the situation or because of preoccupation with other problems.

4. Risk absent but uncertainty present

E.g. An hour ago, a man heard that a plane departing from the airport crashed. The man
knows that his wife was scheduled to fly from the airport earlier today, but he does not
know whether she was on the plane crashed. Here there is no risk as risk refers to future
outcomes. However, there is uncertainty since it relates to past, present and future
situations.

3.The different between risk peril and hazard

Risk- it is a chance of loss such as a loss that a person or property faces.for example;
disability, illness, death

Peril: - refers to the specific cause of a loss. For example, fire, windstorm, theft, explosion,
flood etc. therefore, the source or cause of a loss is called a peril.

Hazard: - refers to the condition that may create or increase the chance of a loss arising from a
given peril. Hazard affects the magnitude and frequency of a loss. The more hazardous
conditions are, the higher the chance of loss. There are three categories of hazards:

Example- if the car was damaged because of the carelessness of driver the peril is car accident

 So here the ‘risk’ is damage to car, the ‘peril’ is car accident and ‘hazard’ is careless
driving by driver
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4. Types of hazard
1. Physical Hazard: - This is associated with the physical properties of the item exposed
to risk. Examples of physical hazard include the following:

- type of construction material such as wood, bricks, etc

- location of property such as near to fuel station, near to flood area, near to earthquake
area, etc.

- occupancy of building such as dry cleaning, chemicals, supermarket etc.working condition

such as machines for personal accidents.

Example- a student was heating a test tube containing a mixture of chemical liquid instead
of heating the mixture gently after heating he immediately put the test tube under the
nose of his friend but both of them were not wearing safety spectacles the mixture of
chemical liquid suddenly squirted out of the test tube onto the left eye and face the student
who screamed consequently for help then the injured student was taken to the hospital and
given medical treatment fortunately the student were not permanent but he had suffered a
great deal of pain.

2. Moral Hazard: - This originates from evil tendencies in the character of the insured
person. It is associated with human nature, qualities, reputation, attitude, etc.

Example; dishonesty, fraudulent intention, exaggeration of claims, etc. …

- When people are more likely to behave disregarded after becoming insured, either
because the insurer cannot observe this behavior for example by failing to renew the
insurance.
3. Morale Hazard: - This originates from acts of carelessness leading to the
occurrence of a loss. It occurs due to lack of concern for events.

Examples are: poor house-keeping in stores

- Cigarette smoking around petrol stations, etc.

- Lina is jamming out to her music while driving to work and accidentally runs a red light.
 in some situations, however, it is difficult to distinguish between a peril and a hazard.
For example, a fire in general may be regarded as a peril concerning the loss of physical
property. It may also be regarded as a hazard concerning auto collisions created by the
confusion in the vicinity of the fire (around the fire).
5. Pure vs. speculative
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- In the pure risk there is a potential loss but no possible gain but in the speculative risk
there is potential gain or loss.
- Pure risks are insurable but speculative are not usually insurable.
- Pure risk exist when there is uncertainty as to whether loss will occur however in the
speculative risk exists when there is uncertainty about an event that could produce
either a profit or loss.
Example for pure risk- chance that someone’s home will be destroyed by a hurricane
- Physical damage to property from fire flood or other natural disasters.
Example for speculative risk- chance that a small business will not succeed
- Reputational risk, brand risk, individual credit risk, accounting risk and others.
6. Personal property and liability risk
A. Personal risk- are risks that are directly affect an individual they involve the possibility
of the loss or reduction of earned income, extra expense and the depletion of financial
asset.
- We can protect ourselves from personal risk by buying life health and disability
insurance.

Example- breaking a leg- missing fun activity

- Driving without insurance- paying a lot of money to repair car

B. Property risk- risk that property may be damaged destroyed or stolen.

Example- Harding invested in stock market and lost money when his stocks value dropped

C. Liability loss- legal judgment may result in payment made to compensate injured
parties as well as to punish those responsible for the injuries.

Example- a customer slipped on slipped water in the store aisle before an employee cleaned
the spill.