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    Risk CHAPTER 1

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    Wonde Biru
    This document defines key concepts in risk management and insurance. It discusses the definitions of risk, peril, and hazard. It also classifies risks as objective vs subjective, financial vs non-financial, and pure vs speculative. The major types of personal risks are premature death, insufficient retirement income, poor health, and unemployment. Property risks involve loss or damage to personal property. Liability risks involve legal responsibility for injury or damage caused to others. Commercial risks threaten business firms with bankruptcy if losses occur.

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    Risk CHAPTER 1

    Uploaded by

    Wonde Biru
    54 views10 pages
    This document defines key concepts in risk management and insurance. It discusses the definitions of risk, peril, and hazard. It also classifies risks as objective vs subjective, financial vs non-financial, and pure vs speculative. The major types of personal risks are premature death, insufficient retirement income, poor health, and unemployment. Property risks involve loss or damage to personal property. Liability risks involve legal responsibility for injury or damage caused to others. Commercial risks threaten business firms with bankruptcy if losses occur.

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    This document defines key concepts in risk management and insurance. It discusses the definitions of risk, peril, and hazard. It also classifies risks as objective vs subjective, financial vs non-financial, and pure vs speculative. The major types of personal risks are premature death, insufficient retirement income, poor health, and unemployment. Property risks involve loss or damage to personal property. Liability risks involve legal responsibility for injury or damage caused to others. Commercial risks threaten business firms with bankruptcy if losses occur.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    54 views10 pages

    Risk CHAPTER 1

    Uploaded by

    Wonde Biru
    This document defines key concepts in risk management and insurance. It discusses the definitions of risk, peril, and hazard. It also classifies risks as objective vs subjective, financial vs non-financial, and pure vs speculative. The major types of personal risks are premature death, insufficient retirement income, poor health, and unemployment. Property risks involve loss or damage to personal property. Liability risks involve legal responsibility for injury or damage caused to others. Commercial risks threaten business firms with bankruptcy if losses occur.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 10

    RISK MANAGEMENT

    AND INSURANCE

    Chapter -1-
    1
    Definitions 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 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
    – Subjective risk is defined as uncertainty based on a
    person’s mental condition or state of mind

    2
    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
    – Physical hazards are physical conditions that
    increase the chance of loss (icy roads,
    defective wiring)
    – Moral hazard is dishonesty or character
    defects in an individual, that increase the
    chance of loss (faking accidents, inflating
    claim amounts)

    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)

    – Legal Hazard refers to characteristics of the legal


    system or regulatory environment that increase
    the chance of loss.

    4
    Classification of Risk
    1. Financial Vs. Non-Financial Risks

    2. Statistic Vs. Dynamic Risks

    3. Fundamental Vs. Particular Risks

    4. Pure Vs. Speculative risks

    5
    • Enterprise risk encompasses all major risks faced
    by a business firm, which include:

    – Pure risk

    – Speculative risk

    – Strategic risk

    – Operational risk

    – Financial risk

    6
    • 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.

    • 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.

    • 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.
    7
    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
    8
    • 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.
    9
     Liability risks involve the possibility of being held
    liable for bodily injury or property damage to
    someone else

     Commercial Risks

    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.


    10

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