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Chapter One Risk and its Treatment - Coggle Diagram
Chapter One Risk and its Treatment
Definition
uncertainty concerning the occurrence of a loss
loss exposure
A loss exposure is any situation or circumstance in which a loss is possible, regardless of whether a loss occurs.
Objective risk: the relative variation of actual loss from expected loss
Subjective Risks: uncertainty based on a person’s mental condition or state of mind.
Chance of Loss: the probability that an event will occur
Peril: the cause of loss
Hazzard
a condition that creates or increases the frequency or severity of loss.
Types of Hazzard
Physical hazard
■ Moral hazard
■ Attitudinal hazard (morale hazard)
■ Legal hazard
Classification of Risk
Classification
Pure and speculative risk
■ Diversifiable risk and nondiversifiable risk
■ Enterprise risk
Major Commercial Risk
property risks
loss of business income
liability risks
other risks.
Crime exposures
Human resources exposures
Foreign loss exposures.
Intangible property exposures
Government exposures
Major Personal Risk
Types
Premature death
■ Insufficient income during retirement
■ Poor health
■ Unemployment
are risks that directly affect an individual or family
Burden of Risk on Society
Budens
The size of an emergency fund must be increased.
■ Society is deprived of certain goods and services.
■ Worry and fear are present.
Techniques for Managing Risk
Risk control
Avoidance
■ Loss prevention
■ Loss reduction
Risk financing
Retention
Active Retention
Passive Retention
Self-Insurance
■ Noninsurance transfers
■ Transfer of risk by contracts
■ Hedging price risks
■ Incorporation of a business firm
Types
■ Insurance
Objective probability refers to the long-run relative frequency of an event based on the assumptions of an infinite number of observations and of no change in the underlying conditions
Subjective probability is the individual’s personal estimate of the chance of loss
Chance of Loss of loss may be identical for two different groups, but objective risk may be quite different
Diversifiable risk is a risk that affects only individuals or small groups and not the entire economy , nonsystematic risk or particular risk
non diversifiable risk is a risk that affects the entire economy or large numbers of persons or groups within the economy systematic risk or fundamental risk.
Enterprise Risk
Enterprise risk is a term that encompasses all major risks faced by a business firm. Such risks include pure risk, speculative risk, strategic risk, operational risk, and financial risk
Strategic risk
Operational risk
Financial risk
Property Risks
Direct Loss
Indirect or Consequential Loss
Liability risks