2 common elements in definition of risk used in insurance
Indeterminacy - Outcome in question
Loss - Atleast one outcome is undesirable
Define risk
A condition of the real world in which there is a possibility of an adverse deviation from an expected or desired outcome
Define uncertainty
A state of mind characterised by doubt, based on a lack of knowledge about what will or will not happen in the future
Peril
Something which causes a loss to occur
Hazard
A condition that may create or increase the chance of a loss arising from a peril
Two types of hazards
Physical
Moral
What are physical hazards
Consist of those physical properties that increase the chance of a loss from the various perils
What are moral hazards
Increase the losses where insurance exists because of a change in attitude toward losses that will be paid by insurance
3 Classifications of risk
Financial and Non-financial
Fundamental and Particular
Pure and Speculative
Fundamental Risk
Losses that are impersonal in origin and affect large segments of population
Particular risk
Arise out of individual events and felt by individuals
Speculative Risk
A situation where there is a chance of gain for individual -> Not insurable
Pure risk
Situation with either loss or no loss
5 Ways of handling risk
RRATS
Retained
Reduced
Avoided
Transferred
Shared
Discuss Risk Retention
Conscious or unconscious:
Unconscious is when it is not perceived. Conscious is opposite
Voluntary or involuntary:
Voluntary retention occurs when there are no more attractive alternatives than doing so
Two ways of reducing risk
Loss prevention / reduction
Control the severity of the loss if it does happen
