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Chapter 1 NATURE OF RISK

Risk refers to the possibility of an adverse or unwanted outcome resulting from uncertainty. There are several key concepts related to risk: 1. Peril refers to the cause of a loss such as fire, flood, or illness. Hazard refers to any condition that increases the chance of a loss occurring. 2. Risks can be classified as pure risks, where the outcome is loss or no loss, or speculative risks, where the outcome could be loss, no loss, or profit. 3. Risks can also be categorized as financial risks, where the outcome is measured monetarily, or non-financial risks where the outcome cannot be measured financially, such as career choices affecting quality of life.

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78 views

Chapter 1 NATURE OF RISK

Risk refers to the possibility of an adverse or unwanted outcome resulting from uncertainty. There are several key concepts related to risk: 1. Peril refers to the cause of a loss such as fire, flood, or illness. Hazard refers to any condition that increases the chance of a loss occurring. 2. Risks can be classified as pure risks, where the outcome is loss or no loss, or speculative risks, where the outcome could be loss, no loss, or profit. 3. Risks can also be categorized as financial risks, where the outcome is measured monetarily, or non-financial risks where the outcome cannot be measured financially, such as career choices affecting quality of life.

Uploaded by

Nurul Syazwani
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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TOPIC 1:

THE NATURE OF RISKS

LEARNING OBJECTIVES
Describe the concept of risk, perils,hazard and loss
Explain different types of probabilities theories
Discuss classification of risk
Distinguish different types of pure risk
DEFINITION OF RISK
A condition in which there is a
possibility of ADVERSE deviation
from a desire outcome that is
expected or hoped for.

Implies some form of


UNCERTAINTY about an
outcome in a given situation.
Possibility of
an unlucky
occurrence

Possibility of Unpredictabl
Loss e

Definition
of RISKS

Combination Uncertainty
of Hazards of loss
RISK & CHANCE
• Uncertainty about an • Some doubt or
outcome of an event. uncertainty about the
• The outcome outcome of an event
normally • The outcome
NEGATIVE normally a
POSITIVE.
CHANC
RISK
E
CONCEPT OF RISK

Although we are uncertain as to


Risk is a situation in Insurance protect risk, when the future losses will take
those who purchase place, it is possible to estimate the
which some kind of
insurance will financially probability of loss by applying the
loss is possible and compensated in case of probability theories provided that
part of life. there is a large number of
loss. exposures.
CONCEPTS OF PERIL,
HAZARD AND LOSS
HAZARD
• A condition that LOSS
increases the chance PERIL • A reduction or
of loss;
• Cause of loss disappearance
• Physical
• Fire, collision, flood, of economic
• Moral hazard value/financial
sickness
• Morale Hazard loss
HAZARD?
PERIL?
TYPES OF HAZARDS

Hazard
A condition that increases the chance of loss

Physical Hazard Moral Hazard


Morale Hazard
Physical condition that A character defect in an
individual that increases the A character defect in an individual
increases the condition of loss that increases the chance of loss with
chance of loss
Eg: wooden house, icy road the knowledge that insurance exists
Eg: Careless, has provided
misleading information about Eg: intentionally do not lock the car
its assets/health since have motor insurance coverage,
Being careless as a doctor because
you have malpractice insurance
PROBABILITY THEORIES
A Priori Probability Empirical Probability Judgmental Probability

• Determined when the • Determined on the basis • Determined based on the


total number of possible of historical data. judgment of the person
events are known. predicting the outcome.
• Example: road accidents.
• Example: the probability • It is used when there is
of getting a six on a roll • The underlying concept lack of historical data or
of dice is 1/6. that makes it possible for credible statistics.
empirical probability to
• This concept has a be measured accurately • Example: Astronaut
limited practical is that as the number of program by Malaysia.
application in the study observations increases, The insurance company
of risk because situations the predicted loss tends in Malaysia uses
where a number of to approach the actual judgmental probability
possible outcome are loss (the law of large due to lack of credible
CLASSIFICATIONS OF RISKS
Pure Risk &
Speculative Risk

CLASSIFICATI Fundamental &


ONS OF RISKS particular risk

Financial value &


non finacial
CLASSIFICATIONS OF RISKS

Pure Risk Speculative Risk

• There are possibility of LOSS • Possibility of LOSS, NO


or NO LOSS LOSS or PROFIT
• Example: pass or fail the
exam • Example: investment
• Types: • Most of speculative risk are
• Personal risk uninsurable
• Property risk
• Liability risk
• insurable
CLASSIFICATIONS OF RISKS
Fundamental risk
• Affects the entire economy or large number of persons/groups within the economy

• Affects the society in general and cannot be controlled


• Example: Tsunami, earthquake

• Usually uninsurable, if insurer agree to insure – limited coverage provided


Particular risk
• Affect particular individuals
• Fail in the exam, not secure a good job

• Those future outcomes that we can partially control

• Arises from individual decisions


• Example: to further study or to seek for a job
CLASSIFICATIONS OF RISKS

Risks
Non Financial
Financial Risks
Outcome can be Outcome cannot
measured by be measured by
monetary terms monetary terms
Example; Example: Choice
Property of career will
damages can be affect ones
measured in quality of life.
terms of loss of
profit
TYPES OF PURE RISKS

Personal Risks
• Risk of premature death
• Significant losses: loss of human value and
additional expenses
• Risk of old age
• Significant loss: insufficient income during
retirement
• Risk of poor health
• Significant losses: Expensive medical charges
and loss of earned income
• Risk of unemployment
• Significant losses: loss of earned income and
depletion of accumulation financial assets.
TYPES OF PURE RISKS

Property Risk
• Direct Loss
• Damage to property by a peril.
• Example: factory destroyed by fire

• Indirect loss
• Loss in consequence of a direct loss
• Example: loss of profit

• Extra expenses
• Extra costs incurred as a result of the loss
• Example: owner have to rent another
building to continue operation/ living.
TYPES OF PURE RISKS

Liability risks
• Risks of being sued because of
neglect, malpractice, or causing
willful injury either to another
person or to someone else's
property.

• Possibility of financial loss if you


are found liable, or the financial
loss incurred just defending
yourself, even if you are not
found liable.
END

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