Chapter 4 Flashcards
What are the 6 types of risk?
- Pure
- Speculative
- Dynamic
- Static
- Fundamental
- Particular
What is a Pure risk?
Risks that have no upside. The best you can hope for when facing a pure risk is that nothing bad happens - the status quo continues.
What is speculative risk?
Risk that have at least one outcome which improves your circumstances.
What is a Dynamic Risk?
Risk that change as the economy changes.
What is a Static risk?
Risk that are considered stable over the short term.
E.g. a car accident you are likely o have a car accident whether the economy is doing well or not
What is a fundamental risk?
Risk which are not independent from each other, they are likely to affect large numbers of people when they occur.
What is a particular risk?
They affect people randomly and independently. Particular risk arises from the personal circumstances of each person, NOT from large scale events. They are independent from one another. This makes their occurrence random, while fundamental risks tends to cluster together.
What are the 7 types of risk management?
- Acceptance
- Avoidance
- Reduction
- Self-funding
- Information
- Risk sharing
- Risk transfer
Describe acceptance as a risk management
One way to deal with risk is simply accept it.
Risk you may consider accepting:
1. Risk that have bearable consequences
2. Speculative risks
3. Fundamental risks - they affect everyone
Describe avoidance as a risk management
Some risks are avoidable. This involves not putting yourself in a situation which involves the risk
Before avoiding a risk you should consider,
Are you foregoing opportunities? (speculative risk)
What are the costs of avoiding the risk?
Describe reduction as a risk management
This refers to either reducing the probability of the event occurring, or reducing the loss associated with the event
Describe self-funding as a risk management
You accept full financial burden of the risk
The decision would be based on:
The likelihood of the risk
The amount that you have to fund, compared to your level of financial resource
The availability and cost of other methods of funding
What other risks are you carrying?
Describe information as a risk management
Risks can be managed by becoming by becoming more informed about them.
Describe risk sharing as a risk management
It involves a group of people agreeing to share a risk that they are subject to. Instead of having a single person in the group being affected by the risk while the others are lucky enough to avoid it, the group agrees that everyone in the group will share the costs of the event that happened to a few of the members.
State the law of large numbers
It states that of you repeat an experiment independently a larger number of times and average the result, what you obtain should be close to the expected value.
Describe risk transfer as a risk management
Risks can be transferred to a third party. This means that if the risky event takes place, the third party will compensate you for the losses that you incur. The third party is effectively taking on the risk.
What is Measure of exposure?
People should pay rates in the proportion to risk they have to hold.
