1. Risk management and insurance

2. CHAPTER 1 Concepts about risk

3. MEANING OF RISK risk is defined as uncertainty concerning the occurrence of a loss

4. Objective Risk & SUBJECTIVE RISK

5. Objective Risk: the relative variation of actual loss from expected loss Subjective Risk: is defined as Uncertainty based on a person’s mental condition or state of mind

6. The law of large numbers as the number of exposure units increases, the more closely the actual loss experience will approach the expected loss experience

7. Chance of loss is defined as the probability that an event will occur

8. Peril is defined as the cause of loss

9. Hazards a hazard is a condition that creates or increases the chance of loss

10. Hazards Legal hazard Morale hazard Moral hazard Physical hazard

11. is a physical condition that increases the chance of loss

12. Moral hazard is dishonesty or character defects in an individual that increase the frequency or severity of loss

13. Morale hazard is carelessness or indifference to a loss because of the existence of insurance

14. Legal hazard refers to characteristics of the legal system or regulatory environment that increase the frequency or severity of losses

15. BASIC CATEGORIES OF RISK Pure Risk & Speculative Risk Fundamental Risk & Particular Risk Enterprise Risk

16. Pure Risk pure risk is defined as a situation in which are there only the possibilities of loss or no loss

17. Speculative Risk Speculative risk is defined as a situation in which either profit or loss is possible

18. It is important to distinguish between pure & speculative risks for three reasons:

20. private insurers typically insure only pure risks The First

21. the law of large numbers can be applied more easily to pure risks than to speculative risks The Second

22. society may benefits from a speculative risk even though a loss occurs, but it is harmed if a pure risk is present & a loss occurs The Third

23. Fundamental Risk fundamental risk is a risk that affects the entire economy or large numbers of people or groups within the economy

24. Particular Risk particular risk is a risk that affects individuals & not the entire community

25. Enterprise Risk is a relatively new term that Encompasses all major risks faced by a business firm. Such risks included pure risk, speculative risk, strategic risk, operational risk, & financial risk

26. Strategic Risk refers to uncertainty regarding the firm’s financial goals & objectives

27. Operational Risk results from the firms business operations

28. Financial Risk refers to the uncertainty of loss because of adverse changes in commodity prices, interest rates, foreign exchange rates, & the value of money

29. TYPES OF PURE RISK the major types of pure risk that can create great financial insecurity include:

30. Personal risks Property risks Liability risks

31. A) Personal risks Personal risks are risks that directly affect an individual There are four major personal risks:

32. 1- Risk of premature death 2- Risk of insufficient income during retirement 3-Risk of poor health. 4-Risk of unemployment.

33. B) Property Risks Persons owning property are exposed to property risks – the risk of having property damaged or lost from numerous causes

34. There are two types of loss associated with the destruction or theft of property: Indirect or Consequential Loss Direct Loss

35. Direct loss direct loss is defined as a financial loss that results from the physical damage, destruction, or theft of the property

36. Indirect or Consequential Loss indirect loss is a financial loss that results indirectly from the occurrence of a direct physical damage or theft loss

37. C) Liability Risks Liability risks are of great importance for several reasons:

38. First, there is no maximum upper limit with respect to the amount of the loss Second, a lien can be placed on your income & financial assets to satisfy a legal judgment

39. Finally, legal defense costs can be enormous

40. METHODS OF HANDLING (MANAGING) RISK : Risk Financing Risk Control there are two categories of handling risk:

41. Risk Control refers to techniques that reduce the frequency & severity of losses. Major risk-control techniques include the following:

42. Loss Reduction Loss Prevention consists of two methods: AvoidanceLoss Control

43. Risk Financing refers to techniques that provide for the funding of losses. Major risk-financing techniques include the following:

44. Retention Non-insurance Transfer Insurance

45. 1- Avoidance a business firm can avoid the risk of being used for a defective product by not producing the product. A) RISK CONTROL

46. Not all risks should be avoided, however. For example, you can avoid the risk of death or disability in a plane crash by refusing to fly. But is this choice practical or desirable?

47. 2- Loss Control Loss control consists of certain activities that reduce both the frequency & severity of losses. Thus, loss control has two major objectives: - loss prevention - loss reduction.

48. 2/1- Loss prevention aims at reducing the probability (frequency) of loss the goal of loss prevention is to prevent the loss from occurring.

49. 2/2- Loss reduction the second objective of loss control is to reduce the severity of a loss after it occurs

50. loss control is highly desirable for two reasons: First, the indirect costs of losses may be large, & in some instances can easily exceed the direct costs

51. Second, the social costs of losses are reduced

52. A risk can be transferred by several methods, among which are the following: 2/1- Transfer of risk by contracts 2/2- Hedging price risks 2/3- Incorporation of a business firm

53. 1- Retention an individual or a business firm retains all or part of a given risk. Risk retention can be either active or passive B) Risk Financing

54. 1/1- Active retention means that an individual is consciously aware of the risk & deliberately plans to retain all or part of it

55. Risk retention, however, is appropriate primarily for high-frequency, low-severity risks. risk retention should not be used to retain low frequency, high-severity risks, such as the risk of catastrophic medical expenses, long-term disability, or legal liability

56. 2- Non-insurance Transfers the risk is transferred to a party other than an insurance company

57. REVIEW TERMS Avoidance Direct Loss Enterprise Risks Exposure to loss Chance of loss تجنب الخطر فرصة الخسارة الخسارة المباشرة أخطار المنشآه التعرض للخسارة

58. Fundamental Risks Hedging Human Life Value Indirect or Consequential loss Hazards أخطار عامة مسببات أخطار مساعدة المشتقات القيمة الإقتصادية للإنسان الخسائر غير المباشرة أو التبعية Financial Risks الأخطار المالية

59. Insured Law of large numbers Legal Hazard Liability Risks Insurer المؤمن عليه المؤمن ( شركة التأمين ) قانون الأعداد الكبيرة مسببات خطر مساعدة قانونية أخطار المسئولية Insurance التأمين

60. Loss control Morale Hazard Objective Risk Particular Risks Moral Hazard التحكم فى الخسارة مسببات خطر مساعدة شخصية إرادية مسببات خطر مساعدة شخصية لا إرادية الخطر الموضوعى أخطار خاصة Loss الخسارة

61. Personal Risks Policy Premature Death Property Risks Physical Hazard الأخطار الشخصية مسببات خطر مساعدة طبيعية وثيقة الوفاة المبكرة أخطار الممتلكات Peril مصدر الخسارة

62. Retention Speculative Risks Subjective Risk Premium Risk الإحتفاظ أو التحمل الخطر أخطار المضاربة الخطر الشخصى القسط Pure Risks الأخطار البحتة