TOPIC 1:
THE NATURE OF RISKS
LEARNING OBJECTIVES
Describe the concept of risk, perils,hazard and loss
Explain different types of probabilities theories
Discuss classification of risk
Distinguish different types of pure risk
DEFINITION OF RISK
A condition in which there is a
possibility of ADVERSE deviation
from a desire outcome that is
expected or hoped for.
Implies some form of
UNCERTAINTY about an
outcome in a given situation.
Possibility of
an unlucky
occurrence
Possibility of Unpredictabl
Loss e
Definition
of RISKS
Combination Uncertainty
of Hazards of loss
RISK & CHANCE
• Uncertainty about an • Some doubt or
outcome of an event. uncertainty about the
• The outcome outcome of an event
normally • The outcome
NEGATIVE normally a
POSITIVE.
CHANC
RISK
E
CONCEPT OF RISK
Although we are uncertain as to
Risk is a situation in Insurance protect risk, when the future losses will take
those who purchase place, it is possible to estimate the
which some kind of
insurance will financially probability of loss by applying the
loss is possible and compensated in case of probability theories provided that
part of life. there is a large number of
loss. exposures.
CONCEPTS OF PERIL,
HAZARD AND LOSS
HAZARD
• A condition that LOSS
increases the chance PERIL • A reduction or
of loss;
• Cause of loss disappearance
• Physical
• Fire, collision, flood, of economic
• Moral hazard value/financial
sickness
• Morale Hazard loss
HAZARD?
PERIL?
TYPES OF HAZARDS
Hazard
A condition that increases the chance of loss
Physical Hazard Moral Hazard
Morale Hazard
Physical condition that A character defect in an
individual that increases the A character defect in an individual
increases the condition of loss that increases the chance of loss with
chance of loss
Eg: wooden house, icy road the knowledge that insurance exists
Eg: Careless, has provided
misleading information about Eg: intentionally do not lock the car
its assets/health since have motor insurance coverage,
Being careless as a doctor because
you have malpractice insurance
PROBABILITY THEORIES
A Priori Probability Empirical Probability Judgmental Probability
• Determined when the • Determined on the basis • Determined based on the
total number of possible of historical data. judgment of the person
events are known. predicting the outcome.
• Example: road accidents.
• Example: the probability • It is used when there is
of getting a six on a roll • The underlying concept lack of historical data or
of dice is 1/6. that makes it possible for credible statistics.
empirical probability to
• This concept has a be measured accurately • Example: Astronaut
limited practical is that as the number of program by Malaysia.
application in the study observations increases, The insurance company
of risk because situations the predicted loss tends in Malaysia uses
where a number of to approach the actual judgmental probability
possible outcome are loss (the law of large due to lack of credible
CLASSIFICATIONS OF RISKS
Pure Risk &
Speculative Risk
CLASSIFICATI Fundamental &
ONS OF RISKS particular risk
Financial value &
non finacial
CLASSIFICATIONS OF RISKS
Pure Risk Speculative Risk
• There are possibility of LOSS • Possibility of LOSS, NO
or NO LOSS LOSS or PROFIT
• Example: pass or fail the
exam • Example: investment
• Types: • Most of speculative risk are
• Personal risk uninsurable
• Property risk
• Liability risk
• insurable
CLASSIFICATIONS OF RISKS
Fundamental risk
• Affects the entire economy or large number of persons/groups within the economy
• Affects the society in general and cannot be controlled
• Example: Tsunami, earthquake
• Usually uninsurable, if insurer agree to insure – limited coverage provided
Particular risk
• Affect particular individuals
• Fail in the exam, not secure a good job
• Those future outcomes that we can partially control
• Arises from individual decisions
• Example: to further study or to seek for a job
CLASSIFICATIONS OF RISKS
Risks
Non Financial
Financial Risks
Outcome can be Outcome cannot
measured by be measured by
monetary terms monetary terms
Example; Example: Choice
Property of career will
damages can be affect ones
measured in quality of life.
terms of loss of
profit
TYPES OF PURE RISKS
Personal Risks
• Risk of premature death
• Significant losses: loss of human value and
additional expenses
• Risk of old age
• Significant loss: insufficient income during
retirement
• Risk of poor health
• Significant losses: Expensive medical charges
and loss of earned income
• Risk of unemployment
• Significant losses: loss of earned income and
depletion of accumulation financial assets.
TYPES OF PURE RISKS
Property Risk
• Direct Loss
• Damage to property by a peril.
• Example: factory destroyed by fire
• Indirect loss
• Loss in consequence of a direct loss
• Example: loss of profit
• Extra expenses
• Extra costs incurred as a result of the loss
• Example: owner have to rent another
building to continue operation/ living.
TYPES OF PURE RISKS
Liability risks
• Risks of being sued because of
neglect, malpractice, or causing
willful injury either to another
person or to someone else's
property.
• Possibility of financial loss if you
are found liable, or the financial
loss incurred just defending
yourself, even if you are not
found liable.
END
