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Risk Means The Uncertainties Regarding Financial Loss'

Risk refers to uncertainty regarding potential financial losses. There are several types of risk, including pure risk (possibility of loss but no gain), and speculative risk (possibility of loss or gain). Key tools for managing risk include transferring risk through methods like insurance, retaining risk by self-insuring, avoiding risks when possible, and controlling potential losses. Proper risk management is important for individuals, businesses, and society to mitigate the negative economic impacts of losses.

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64 views

Risk Means The Uncertainties Regarding Financial Loss'

Risk refers to uncertainty regarding potential financial losses. There are several types of risk, including pure risk (possibility of loss but no gain), and speculative risk (possibility of loss or gain). Key tools for managing risk include transferring risk through methods like insurance, retaining risk by self-insuring, avoiding risks when possible, and controlling potential losses. Proper risk management is important for individuals, businesses, and society to mitigate the negative economic impacts of losses.

Uploaded by

sameer khan
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Definition

Definition of
of risk
risk

Risk means the uncertainties


‘

regarding financial loss’.


Risk is often used to mean uncertainty. Risk creates both
problems and opportunities for businesses and
individuals. Executives, employees, investors, students,
travelers and formers all confront risk and deal with it in
various ways.
Understanding risk and loss
Risk: life is full of risks. Some risks are preventable
or can at least be minimized, some are avoidable and
some are completely unforeseeable.

What’s important to know about risk when thinking


about insurance.
the type of risk,
the effect of that risk,
the cost of the risk
what you can do to mitigate the risk.

Let’s take the example of driving a car and the risks


involved. The type of risks are: bodily injury, total
loss of vehicle, having to fix your car or repair.
What is loss?
Loss is defined as unintended, unforeseen damage
to property, injury, or the amount the insurance
company is obligated to personal injury pay.

Peril
Peril is defined as the cause of loss. For example if a house
burns by fire the peril or cause of loss is fire

Hazards
A hazards is a condition that creates or increase the
chance of loss
For example icy road that increase the chance of an
automobile accident. Defective wiring in a building
that increases the chance of fire and defective lock
on a door that increase the chance of theft.
The effect or burden of risk
• The risk surrounding potential losses creates important
economic burdens for businesses, government, and
individuals. Businesses as well as individuals may try to
avoid risk of loss as much as possible or to reduce its
negative consequences. For example a business located
near to a river increase the possibility of periodic
flooding. When a flood occurs, property damage and
revenue loss occurs.

The presence of risk results in certain undesirable social and economic effect. Risk contains
three major Burdon on society.
1. the size of the emergency fund must be increased
2. In the absence of insurance emergency fund will be increased by the business
3. society is deprived of certain goods and services
Production of certain product must be prevented as certain companies avoided the
production of certain product like children vaccine as more burden associated with.
4. worry and fear are present
5. Some passenger in commercial jet may extremely nerves
Types of risk
Pure risk:
it involves an uncertainty as to whether loss will occur. No possibility of gain is involved
in pure risk.
Pure risk involves only two types of outcomes: loss or no loss with no possibility of gain
or loss. For example the chance of being robbed. No opportunity of gain exists if the
robbery does not occur. Only an opportunity for loss if it does. Some other examples
are damage to property by fire or flood or death caused by accident or illness. Only
pure risks are insurable.

For example
Premature death caused by accident or illness
Damage to property from fire lighting , flood or
earthquake
The chance of being robbed. No opportunity of gain
exists if the robbery does not occur. Only an
opportunity for loss if it does. . Only pure risks are
insurable.
Speculative risk:
speculative risk exists when there is uncertainty about an event that could
produce either a profit or a loss. Business ventures and investment
decisions are examples of speculative risk.
Speculative risk involves three possible outcomes, loss, no loss or profit. i.e.
investing in stock market is a speculative risk. Speculative risk is not
insurable.

Example
investing in share
investing in real estate
Launching a new product.
Market risk
Technology risk
Risk management, techniques and tools of risk management

To achieve greater security: individual, families, businesses and


institutions have five basic ways to handle risk-
TRAIL .

1.) T=Transfer other then insurance: it is a risk management tool


to transfer risk. It involves payment of one party (transferor)
to another (transferee or risk bearer). It means that risk is
shifted from the transferor to the transferee for a price. Five
forms of risk transfer are hold harmless agreements,
incorporation, diversification, hedging and insurance.
Hold harmless agreements
It is a such type of contract agreements in which
some type of responsibility for some type of
losses can transfer to a party other then the
principal party. i.e. AAA construction company is
building an office complex for BBB Company. AAA
company engages CCC contractors to do the
electrical wiring in the buildings. Now CCC
Company is responsible for any liability losses
arising from faulty wiring.
incorporation
This is another way to transfer risk to
form incorporation business. It means
personnel property of the owners can not
be attached to help pay for business
losses.ie form a corporation business or
company.
Diversification:
Diversification means to divert or
transfer of risk across business
units.
Hedging:
it is a business transaction in which
the risk of price fluctuations is
transferred to a third party .ie. oil
price fluctuation in the market so an
airline company hedge this risk.
2.) RETENTION
Retention involves assumption of risk.
It means that if a loss occurs an
individual or firm will pay for it out
of funds available at that time or
make a reserve fund.
.
3.)AVOID RISK
it means to avoid risk not to take activities in which risk is
involved. ie to avoid traveling by air is avoid to decrease the
chance of dying in air plan crash accident.

4.)INSURANCE:

it is also a technique of transfer risk.


5.)LOSS CONTROL:
when particular risk can not be
avoided, actions may be taken to
reduce losses of risk. Loss control
involves making decisions regarding
the manners to performs activities to
control loss of risk.

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