Chapter One Introduction to Risk Managemnt
Objective Risk
- Defined as the relative variation of actual loss from expected loss
- Declines as the number of exposure units increases
- 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