Risk Management - Drive safely, wear seatbelts, insurance, lock vehicle,
driver's Ed, obey laws, car alarm, park in safe areas
- Exposure - -Things of Value (Assets) That Could be Lost
- Perils - -Things That Could Happen to These Assets
- Risk Management - -What do you to protect these assets and/or
prevent/reduce losses?
- calculated possibility - -A probabilistic outcome (chance of loss, likelihood
of loss) that is known or estimated
• Ranges from 0 to 1 (0% to 100%)
0- impossible
0.5 - Highest Risk
1 - Certain Event
- Negative outcomes - -Loss
Must be quantifiable in $$$
- Frequency - -How often does a loss occur?
• The number of losses (such as fire, theft, collision) that occur within a
specified time period.• Probability of a loss.
,• Ex: Probability of a fire is 0.0071 per loss exposure per year.
- severity - -• How much does it cost when a loss does occur?
• The dollar amount of loss for a specific peril (fire, theft, collision).
• Example: Average structure fire loss is about $25,000
- Peril vs. Hazard - -Peril is the CAUSE of loss.
Like fire storm flood
Hazard is a condition that increases LIKELIHOOD of loss but doesn't cause it
four types - Physical, moral, morale(attitude), legal
- 1. Physical Hazard - -A physical condition that increases the frequency
and/or severity of a loss.
is a hazard that arises from the condition, occupancy, or use of the property
itself.
An example of a physical hazard is a skateboard left on the porch steps.
- Moral Hazard - -Book definition
Dishonesty or character defects in an individual that increase the frequency
and/or severity of a loss.
Better definition
The presence of insurance changes the behavior of the insured.
Examples
• Using a hammer to create "hail" damage to a roof.
• Exaggerating the value of insured property
- 3. Morale (Attitudinal) Hazard - -Carelessness or indifference to a loss,
which increases the frequency and/or severity of a loss.
Examples:
• Leaving car keys in an unlocked car.
• Neglecting a tree limb growing over your roof.
- 4. Legal Hazard - -Characteristics of legal system or regulatory
environment that increase the frequency and/or severity of a loss.
Examples:
• Juries in some jurisdictions are more sympathetic than other areas
(meaning larger damage awards in liability lawsuits).
• Georgia now requires Diminution in Value to be paid on property losses
(meaning increased severity in Georgia).
- Risk Classifications - -• Pure Risk vs. Speculative Risk
- Pure vs. Speculative Risk - --A pure risk is a situation in which there are
only the possibilities of loss or no loss (earthquake, fire accident)
-A speculative risk is a situation in which either profit or loss is possible
(gambling, investment)
- can you buy insurance for pure risks? - -Yes, typically but some types can
be hard to insure
- Can you buy insurance for speculative risks? - -generally no
- Diversifiable Risk - -• Affects only individuals or small groups, not entire
economy.
• Can be reduced/eliminated through diversification. (Have multiple facilities,
cloud / backup data centers)
• Risks are not correlated (For example: fire at multiple locations, theft,
vehicle collision).
- Nondiversifiable Risk - -• Affects the entire economy or large numbers of
groups/persons within the economy.
• Cannot be reduced/eliminated through diversification.
• Government assistance may be needed to insure.
• Risks are correlated (inflation, unemployment).
- Enterprise Risk - -Encompasses all major risks faced by a business firm:
• Pure Risk
• Speculative Risk
• Strategic Risk*
• Operational Risk*
• Financial Risk*
- Systemic Risk - -• Risk of collapse of an entire system or entire market
due to the failure of a single entity or group of entities that can result in the
breakdown of the entire financial system.
• Instability in the financial system due to the interdependency between the
players in the market
- Major Types of Pure Risks - -• Personal Risk
• Property Risk
• Legal Liability Risk
• Loss of Business Income
• Cyber-security
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