Risk Management Topic 1

How do you measure risk objectively

AL - EL (ACTUAL RISK - EXPECTED RISK)

What are the 3 different variations of actual losses from expected losses (objective measurements of pure risk)

AL = EL - Neutral AL < EL - good variation AL > El - bad variation

What is a moral hazard?

Moral hazard is when the presence of insurance (or something that looks a lot like insurance causes the insured persons behavior to change to increase the frequency or severity of the loss

what is the difference between Moral and Morale hazard?

Moral hazard is when the presence of insurance causes the insured person to act differently to increase the frequency or severity of a risk. Morale hazard is when there is carelessness regarding loss

Give 2 examples of pure risk

Natural disaster; flooding, fire, theft, sickness, death

what are two examples of STATIC risk?

Natural disasters- floods, fire, theft, death

what are the three major types of pure risk?

Personal, property, liability (everyone faces these types of pure risk)

What are the 3 types of hazards?

Physical, Moral, Morale

What is the difference between pure risk and speculative

Pure risk- 2 possible outcomes. Loss or no loss. Losses associated with pure risk are insurable like natural disasters Speculative risk- 3 possible future outcomes. loss, gain, no loss/no gain. harder to insure like gambling

what are two examples of the cost of risk management?

Training programs, safety programs, insurance

what is risk?

Uncertainty about future losses

what is human capital?

Your ability to generate income

what is an example of a morale hazard?

employees scheduling unneeded doctor visits simply because they can*

What is a hazard?

A condition that increases either the frequency or severity of the loss. Can increase both frequency and severity.

What is a morale hazard?

Consists of carelessness or indifference that individuals have because they are covered by insurance and protected from loss.

what are the costs of 'risk management'

Costs associated with financing a loss. Costs of loss mitigation costs

What are two examples of DYNAMIC risk?

Internet/privacy risk, cybersecurity threats, terrorism, tax laws, pandemics s

What are two examples of Moral hazard?

1) Building owner burns their own building down to collect proceeds from property insurance (Increases frequency) 2) Husband kills wife to collect proceeds from life insurance policy (Increases frequency)

what are 2 examples of a physical hazard?

1) If flooding is the peril then property located in a flood zone is a LOCATION HAZARD. It increases the severity of the risk. 2) If the peril is a fire then having a building used as a church as is a USE HAZARD since churches are more prone to fires 3) If the peril is an earthquake then a brick structure is a physical CONSTRUCTION HAZARD because brick could collapse quicker

What are the 4 factors affecting risk?

1) Peril 2) Frequency of the risk 3)Severity of the loss 4)Hazards

What are two examples of the 'cost of risk'

Financial loss- medical malpractice in a hospital. loss of goodwill- Reputation loss, loss of income.

what is subjective measurement of risk?

How somoenes attitude and perception of a risky situation/ uncertainty affects how the risk is dealt with

what are the two sources of pure risk?

Human capital and ownership of financial or physical assets

what are the 3 different types of attitudes toward risk?

Risk averse risk neutral risk lovers

What is the difference between risk and probability?

Risk is uncertainty, probability is the likelihood of the loss occurring . Risk is NOT the same as probability because if the PROBABILITY of a risk occurring is 100% then there is no risk.

Give 2 examples of speculative risk

Starting a new business, gambling, Investments (stocks, bonds)

What is the difference between static vs. Dynamic risk?

Static risks do not really change overtime Dynamic risks arise from circumstances that are always changing

what is a peril?

The immediate cause of the loss