mid term - CHAPTER 1: Risk: uncertainty concerning the...

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CHAPTER 1: Risk : uncertainty concerning the occurrences of a loss. Objective risk degree of risk, as the relative variation of actual loss from expected loss.varies inversely with the square root of the no of case under observation. Standard deviation, the law of large no states that as the no of the exposure units increase the more closely the actual loss experience will approach the expected loss experience. Subjective risk:uncertainty based on a person mental condition or state of mind. Mental uncertainty. High sr often results in conservative & prudent behavior while low sr may result in less conservation behavior. Chance of loss the probability that an event will occur. Objective probability : long run relative frequency of an event based on the assumption of an infinite no of observation and of no change in the underlying condition. Subjective :is the individual’s personal estimate of chance of loss. Peril :the cause of loss; Hazard: condition that creates or increase the chance of loss. Physical condition that increase the chance of loss: moral is dishonesty or character defects that increase the frequency or severity of loss: Morale: carelessness or indifference to loss because of existence of insurance. Legal: characteristics of the legal system or regulatory environment that increase the frequency of serverity of loss. CATEGORIES OF RISK: Pure ; a situation in which there are only one possibilities of loss or no loss Speculative : a situation in which either profit or loss is possible. Fundamental : affect the entire economy or large no within the economy, Particula r risk:affect only individuals and not the entire community. Enterprise; encompasses all major risks faced by a business firm. Enterprise risk management combimes into a single unified treatment program all major risks faced by the firm. HUMAN life value : present value of the family share of the deceased breadwinner future earnings. Financial : the uncertainty of loss because of adverse changes in commodity price, interest rate, foreign exchange rates and the value of money. TYPES OF PURE RISK: Personal directly affect an individual death, insufficient income, poor health, unemployment Property: damaged or lost direct loss: financial loss that result from the physical damage indirect & consequential : from occurrence of a direct physical damaged. Liability: no maximum upper limit with respect to the amt loss, a lien can be placed on ur income and financial assets to satisfy a legal judgement. Burden of risk on society: large emergencey fund. Loss of certain good and services , worry & fear: METHOD OF HANDING RISK: Avoidance: Loss Control :reduce frequency and severity of losses: Prevention : reduce probability of loss reduce frequency of losses Reduction : reduce the severity: Retention :active aware of risk and deliberately plans to retain all or part of it. Passive: unknowingly retained because of ignorance, indiffence or laziness. Noninsurance transfers: transferred to a part other than an insurance company. Transfer risk by contracts, Hedging price risk, incorporation
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mid term - CHAPTER 1: Risk: uncertainty concerning the...

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