RMI 2302 Module 1: Basics of Risk

Severity/Impact

"how bad is it when it happens" Severity is often measured in terms of financial loss. We often measure the expected severity, or what we expect the loss to be when it occurs.

Frequency/Likelihood

"how often is something to occur?" over what time frame" How often something happens is usually compared to how many times it could have happened. Think probability

Pure Risk

"will there be a loss or no loss" there are clear expectations these risks only involve two possible outcomes

The Burden of Risk on Society

1) The need for larger emergency funds. This is not the highest and best use for these funds and therefore there is an opportunity cost to keeping the funds on reserve where they cannot benefit society. 2) Loss of needed goods and services (opportunity cost) due to the lack of funds 3) Fear and worry - when these fears of potential risk begin to weigh too heavily, economic losses occur. The US economy is built upon consumer confidence.

What are the two reasons that potential severity must be measured for?

1) a notion of severity is necessary for classifying irks. Whether an exposure will be classed a critical, important or unimportant depends o the potential severity of loss. 2) Severity is also measured to determine the amount of insurance that should be purchased when the decision is made to transfer the risk

Risk prevention methods are best applied to what?

Frequency of losses

Risk Likelihood

Frequency- the probability that a loss can occur. This can be described as high, medium, or low: High: an event is expected to occur in most circumstances Medium: an event will probably occur in many circumstances Low: an event may occur at some time

What are the two types of hazards?

Physical and Intangible Hazards

the Scientific View of Risk: Definition of Risk

Risk is a probability and is expressed as a fraction or ratio of the number of people who experienced the adverse effect divided by the number of people who engaged in the activity

Risk reduction methods are best applied to what?

Severity of losses

Risk Impact

Severity: the potential effect that a loss could have if it arises High: serious impact on operation, reputation or funding status Medium: significant impact on operations, reputation or funding status Low: an event may occur at some time

Steps of the Risk Management Process

Step 1: Determine the objective Step 2: Identify the risks Step 3: Evaluate the Risks Step 4: Consider the Alternatives Step 5: Implement the Decision Step 6: Evaluate and Review

Definition of risk on the society level

Uncertainty regarding loss and things that effect society as a whole. It has to effect a large portion of its constituents

Speculative Risk

Will there be a loss, no loss, or a gain

Variance

[Loss Value - E (loss)]^2 c P (loss)

Exposure

a person or porter facing risk of loss

Risk Control

aimed to reduce the number of risk facing the organization or the amount of loss that can arise from these exposures

Intangible hazards

attitudes or culture

Moral Hazard

behavioral changes - effects the frequency/ severity of loss

Hazard

condition of affecting the frequency or severity of loss. They affect perils

How do you figure out what is risker?

consider relative variation of actual from expected loss

Liability Risks

having to take responsibility for your actions/ inactions

Expected value/loss

how often it occurs multiplied by how bad it is when it occurs

Cost Benefit Analysis:

if the expected gain is high than alternatives then yes of the activity.

Morale Hazard

indifference

Societal Hazard

legal or cultural attitude -effects the frequency/ severity of loss

Secondary risk

organizational level risk, have nothing to do with an organization or business does

Core risk

organizational level risks - these are directly associated with what an organization or business does

Loss Distribution

outline, chart or graphs that lists all the possible losses and their probabilities

Risk Neutral

people who are indifferent towards risks. The value of risky situations is the expected loss or expected outcome

Risk Seeker

people who prefer risk. Willing to pay more than expected return/ gain to engage in risky situations

Physical Hazard

property/ tangible conditions (aka tangible hazards)

Personal Risk

related to life, health, safety on individual level

Property Risk

related to the potential damage to physical property/ material things/ stuff

Fundamental Risk

risks that effect everyone/ a large portion of the population at the same time.

Particular Risk

risks that effect individuals/ a small group of people at a given time

Financial Risks

savings and investments

Coefficient of Variation

standard deviation divided by E (loss)

Dynamic Risk

the chances of something happening now and happening later are different. They change through time.

Risk Averse

the general population is this - people who prefer to avoid risk. Willing to pay more than the expected los to void risk

Peril

the immediate cause of loss

Risk Management

the scientific approach to dealing with risks 1) Don't Risk a lot for a little 2) Consider the odds 3) Don't Risk more than you can afford to lose

Standard Deviation

the square root of variance

Law of Large Number

this law narrows the range of Outcomes

Definition of risk on the individual level

uncertainty regarding loss

Definition of risk on the organizational level

uncertainty regarding loss and the things that precent the organization from reaching their objectives. It adversely affects the achievements of an organization's objectives

Risk

uncertainty regarding loss. There are different magnitudes of risk based on the decision maker: individual, organization, and society. Danger does not equal risk. Information does not alter risk

Risk Profile

way of prioritizing risks

Loss

what you could have had, but don't can be considered a loss

Uncertainty

when you do not know the outcome, there is uncertainty. Multiple outcomes can also lead to uncertainty. Uncertainty is doubt about our ability to predict future outcomes. Because uncertainty is subjective. it can differ across individuals even when the risk is the same. Information can alter uncertainty. Reduction in uncertainty can be a good thing.