Chapter 1 - Components of Risk Flashcards
How is risk used in insurance?
- To describe a type of policy cover
- To name the physical object being insured
- To refer to the chance of an insured loss occurring
Distinction between risk and uncertainty
Risk = the statistical probability of an event that can be calculated Uncertainty = Too many variables to make the the risk calculation accurately
Why do organisations prefer to use the word uncertainty over risk?
Risk has negative connotations whilst uncertainty is neutral
What is chance?
A loss or event we cannot predict or prevent
What must be taken into consideration in assessment of risk?
Frequency and severity
What is a peril?
What gives rise to a loss, e.g. fire or flood
What is a hazard?
What influences the operation or effect of the peril
What is physical hazard?
The physical characteristics of the risk and includes a measurable dimension of the risk
What is moral hazard?
This arises from the attitude and behaviour of people.
List the 9 behaviours that influence risk perception
- Voluntariness
- Controllability
- Delay
- Man made and natural risks
- Familiarity
- Expected Benefits
- Media
- Dread and unknown risks
- Other influences on risk perception
What is a dread risk?
Risks people feel like they have little control and which have dreadful consequences i.e. Nuclear accidents
What is an unknown risk?
Risks which people have limited knowledge about i.e. solar flares or nanotech.
What is group think?
Individual members of the group departing (consciously or unconsciously) from their expected response to conform to group pressure
Do risk aware organisations follow their risk appetite blindly?
No
How is appetite for risk moderated?
By the ability to tolerate types/levels of loss
Risk appetite is…
the principles that a company follows with respect to risk taking
Risk tolerance is…
the qualitative and quantitative boundaries around risk taking
What is risk culture?
A term used to describe the appetite, attitude and understanding shared by a group of people
Is risk culture a continuous process?
Yes
How is risk culture displayed?
Mixture of formal and informal processes and behaviours
What are the characteristics of a problematic organisation?
- Poor leadership sending unclear messages about acceptable levels of risk
- Where is risk is perceived to be managed intuitively
What is a risk mature culture?
Recognises and accepts that uncertainty is inevitable and welcomes it as a chance to reap rewards with effective risk management.
Is risk management a decision making process?
Yes
What is availability bias?
Overestimating the probability of memorable events
What is an anchoring effect?
Human tendency to rely heavily on first piece of information offered.
What leads to human errors in decision making?
- Mental shortcuts (Heuristics)
- Availability Bias
- Anchoring Effect
