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Risk In Our Society 1st Session

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I. What is Risk? <ul><li>Uncertainty Concept </li></ul><ul><li>The majority of Insurance authors define risk as uncertainty . </li></ul><ul><li>If we consider Risk and Probability . If the probability of an event occuring is either zero or one, there is no Risk since there is no uncertainty. </li></ul>

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Objective and Subjective Risk <ul><li>Risk has both Objective and Subjective aspects. </li></ul><ul><li>Objective Risk: </li></ul><ul><li>Defined as the relative variation of actual loss from expected loss. </li></ul><ul><li>Declines as the number of exposure units increases. </li></ul><ul><li>Is measurable by using the standard deviation or coefficient of variation. (Law of Large Numbers). </li></ul>

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Objective and Subjective Risk <ul><li>Subjective Risk: </li></ul><ul><li>Defined as uncertainty based on one’s mental condition or state of mind. </li></ul><ul><li>Difficult to measure! </li></ul>

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II. Chance of Loss <ul><li>The chance of loss is closely related to the concept of Risk. The Chance of Loss is defined as: the probability that an event will occur . Like Risk, ”probability” has both Objective and Subjective aspects. </li></ul>

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Objective and Subjective Probability <ul><li>Objective Probability: </li></ul><ul><li>Deductive Reasoning (A Priori) Determined by logical deduction such as in games of chance. </li></ul><ul><li>Inductive Reasoning (Empirically) </li></ul><ul><li>Determined by induction through the analysis of data. </li></ul>

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Objective and Subjective Probability <ul><li>Subjective Probability: </li></ul><ul><li>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, personality, and the use of alcohol or other recreational drugs! </li></ul>

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III. Basic Categories of Risk <ul><li>Pure and Speculative Risk </li></ul><ul><li>Pure Risk: </li></ul><ul><li>A situation where there are only the possibilities of Loss or no Loss. </li></ul><ul><li>Speculative Risk: </li></ul><ul><li>A situation where either profit or loss is possible. </li></ul>

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Pure and Speculative Risk <ul><li>Why the distinction between Pure and Speculative Risk is important: </li></ul><ul><li>Firstly , Private Insurance Companies generally only insure Pure Risks. </li></ul><ul><li>Secondly , The Law of Large Numbers can be applied more easily to Pure Risks than to Speculative Risks. </li></ul><ul><li>Thirdly , Society may benefit from a Speculative Risk even though a loss occurs, but it is harmed if a Pure Risk is present and a loss occurs. </li></ul>

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Fundamental and Particular Risks <ul><li>Fundamental Risk: </li></ul><ul><li>Is a Risk that affects the entire economy or large numbers of people or groups within the economy. For example, economic recession or widespread hurricane damage. </li></ul><ul><li>Particular Risk: </li></ul><ul><li>Is a Risk that affects only individuals and not the entire community. </li></ul>

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IV. Types of Pure Risks <ul><li>Personal Risks </li></ul><ul><li>The four main Personal Risks are: premature death, old age, poor health, and unemployment. </li></ul><ul><li>Property Risks </li></ul><ul><li>Types of losses include: direct physical damage losses, theft losses, indirect or consequential losses, and extra expenses. </li></ul><ul><li>Liability Risks </li></ul><ul><li>The loss is: Legal liability for damages arising out of bodily injury or property damage to another party. </li></ul>

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V. Burden of Risk on Society <ul><li>Need for a larger Emergency Fund </li></ul><ul><li>It is prudent to set aside funds for an emergency. </li></ul><ul><li>Loss of Needed Goods and Services </li></ul><ul><li>Society is deprived of certain goods and services. </li></ul><ul><li>Fear and Worry </li></ul><ul><li>The mental unrest and fear caused by the presence of Risk. </li></ul>

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VI. Methods of Handling Risk <ul><li>Avoidance </li></ul><ul><li>Is one method of handling Risk! </li></ul><ul><li>Loss Control </li></ul><ul><li>Loss Prevention and Loss Reduction </li></ul><ul><li>Retention </li></ul><ul><li>Active (desirable): Is the deliberate choice to assume part or all of a loss exposure. </li></ul><ul><li>Passive (dangerous): Often results from ignorance or inertia. </li></ul>

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VI. Methods of Handling Risk <ul><li>Non-Insurance Transfers </li></ul><ul><li>- Contracts </li></ul><ul><li>- Hedging </li></ul><ul><li>- Incorporation </li></ul><ul><li>Insurance </li></ul><ul><li>For most people, Insurance is the most practical method for handling a Major Risk. </li></ul>