Chapter 1 The Nature of Risk

Content The meaning of risk The Classification of Risk Risk Management Managing Personal Risks through Insurance

1. The meaning of risk Risk is the possibility of an unfortunate occurrence. Risk is a combination of hazards. Risk is unpredictability—the tendency that the actual results may differ from predicted results. Risk is uncertainty of loss. Risk is the possibility of loss.

1.1 The Uncertainty Examples: If a child is playing in the middle of a busy road, If a workman is using a machine while it is faulty and dangerous, If a pedestrian is unaware that a wall running alongside a pavement is in a dangerous condition and about to collapse, what will happen to them? Two aspects of uncertainty in all of these situations.

1.2 The Basic Element of Risk Peril and Hazard Elements Peril loss

1.2 The Basic Element of Risk Peril and Hazard Elements Peril loss

Hazard Hazard will influence the outcome. These hazards are not themselves the cause of the loss, but they can increase or decrease the effect if a peril operates. Physical Hazard Morale Hazard

 Physical hazard: It relates to the physical characteristics of the risk, such as the nature of construction of a building, the location of a storehouse, security protection at a shop or factory, or the proximity of houses to a riverbank.

 Moral hazard: It concerns the human aspects which may influence the result or the outcome. This usually refers to the attitude of the insured person, such as fraudulence, non-disclosure or destruction of the subject matter of insurance on purpose or deliberately.

Perils Perils will give rise to the loss or damage. Often it is beyond the control of anyone who may be involved. The peril is the prime cause of the loss.

Loss Loss means the reduction of financial value non-deliberately, unexpectedly. It includes: Direct Loss Indirect Loss

2. The Classification of Risk the result or the outcome can be measured by money. material damage to property, theft of property Financial risk ： classification measurement is not possible. selection of your career, the choice of your marriage partner or spouse. Non-financial risk ：

2.2 Pure and speculative risk loss or a break-even situation. There is no chance of gaining profits. Pure risk ： classification a loss, a break-even or the chance of gaining profits Speculative risk ：

2.2 Fundamental and Particular risk arising from causes outside the control of any one individual or even a group of individuals. Earthquakes, floods, famine, volcanoes and other natural disasters. Social changes, political interventions and war. Fundamental risk classification Particular risks refer to personal risks. such as fire, theft, injury and motor accidents. Particular risk

3. Risk Management 3.1 Identifying risk 3.2 Avoiding risk 3.3 Controlling risk 3.4 Accepting risk 3.5 Transferring risk

4. Managing Personal Risks through Insurance 4.1 Characteristics of insurance risks  The loss must occur by chance  The loss must be definite  The loss must be significant  The loss rate must be predictable  The loss must not be catastrophic to the insurer

Relations between risk, insurance and risk management Risk is the preconditions of the existence of insurance. Risk is the objective bases of the development of insurance. Relations Insurance is the effective measures of risk management

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