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Risk topic 1
| Question | Answer |
|---|---|
| Uncertainty | Regarding events which might produce loss |
| Pure Risk | =A loss which is certain has %100 chance - an impossible loss has %0 chance of happening |
| Probability of the loss | Probability is the number that indicates how likely the event is to occur. Ranges from 0-1. Risk does not equal the probability of the loss |
| Pure | The losses are typically insurable (flood,fire,sick) |
| Speculative Risk Gain or loss | No gain or loss (gambling, stock, buy home) Basis for enterprise risk management (ERM). Most businesses face more speculative risk than pure risk |
| Static risk | Does not change signigically overtime Risk always presents for organizations, society, individuals ,etc Natural disasters, death |
| Dynamic | Arises out of changing circumstances AI, social media |
| Diversifiable | Not highly correlated Random-not dependent on one another Impacts only some individuals, group car accident involving 2 cars |
| Non diversifiable | Highly correlated simultaneous occurrence of many losses from a single event impacts large segments of society at once natural disasters inflammation, unemployment |
| Objective risk (measurment of risk) | Measurable variation is uncertain outcomes based on facts and data Variation is key, more variation means more risk Let the numbers speak- view the risk strictly through the data |
| Subjective risk (measurement of risk) | An individual's view of uncertainty or the situation involving risk (travel, airplanes) Depends upon the individuals, measures attitude towards risk |
| Perilc (1st factor of affecting risk) | Is the WHAT not the why The immediate cause of the loss Fire, food, theft, injury, sickness, death |
| Frequency of the loss (2nd affecting risk) | How often do losses occur Number of losses in a given time period How often? 0,1,2,3 1......100 liklyhood ow frequency losses- low probability loss high frequency losses- high probability loss |
| Severity of the loss (3rd effecting factory) | Given that a loss has occurred, how bad is it in $$$ terms? Severity is conditional upon frequency being positive |
| Hazard (4th affecting factor) | Underlying condition lying behind a loss occurrence with either Increase frequency of loss increase severity of the loss Increase both frequency and severity |
| Physical hazards (1st) | 1 location- if peril is flood, living at the shore is a physcial hazard (frequency) If peril is fire, distance to fire hydrate close (serverity) 2 Constuction- Firewood is physcial hazard (frequency, serveerity) 3 Use- university class building vs chur |
| Moral Hazard (2nd) | Act behavior different because of the existence of insurance Frequency or severity increases because the existence of insurance Insurance Fraud Arson Burn your own building |
| Morale Hazard (3rd) | Carelessness concerning losses Has nothing to do with the existence of insurance Decision making process- manage pure and speculative risk |
| Goal in TRM | Minimizing financial impact on organization |
| Goal is ERM | Maximizing shareholder value |
| Risk management function | 1960's Professor Wayne Snyder coins the term risk management Begins evolution into strategy |
| Steps in the RM process | 1 Identification of exposure to loss 2 Evaluate the exposure 3 identify possible alternative 4 Select among the alternatives 5 implantations of the chosen option 6 Re-evaluate periodically those strategies |
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