Chapter One Introduction to Risk Managemnt

Objective Risk

  1. Defined as the relative variation of actual loss from expected loss
  1. Declines as the number of exposure units increases
  1. Can be measured by using the standard deviation or coefficient of variation

Subjective Risk

Defined as uncertainty based on one’s mental condition or state of mind

Difficult to measure

Chance of Loss

Objective Probability

A priori—by logical deduction such as in games of chance

Empirically—by induction, through analysis of data

Subjective Probability

a personal estimate of the chance of loss. It need not coincide with objective probability and is influenced by a variety of factors including age, sex, intelligence, education, and personality.

Chance of Loss Distinguished from Risk

although chance of loss may be the same for two groups, the relative variation of actual loss from expected loss may be quite different.

Peril and Hazard

Peril—defined as the cause of loss

Hazard

hysical hazard—

Moral hazard

Attitudinal (Morale) hazard

Legal hazard

Basic Categories of Risk

Pure and Speculative Risk

Diversifiable Risk and Nondiversifiable Risk

Enterprise Risk

Major Personal Risks and Commercial Risks

Personal Risks

Risk of premature death

Risk of insufficient income during retirement

Risk of poor health

Risk of unemployment

Property Risks

Direct loss

Indirect or consequential loss

Liability Risks

Commercial Risks

Property risks

Liability risks

Loss of business income

Other risks

Crime exposures, human resources exposures, foreign loss exposures, intangible property exposures, government exposures

Burden of Risk on Society

Need for a Larger Emergency Fund

Loss of Needed Goods and Services

Worry and Fear

Techniques for Managing Risk

Risk Control

Avoidance

Loss prevention

Loss reduction

Risk Financing

Retention

Noninsurance transfers

Commercial insurance

What is Risk? Meaning

Different definitions of risk; risk historically has been defined as uncertainty.

Static & Dynamic Risk