IF1 -Chapter 1 Flashcards
Risk Management
attempting to deal with risks we face - How much will it cost if things go wrong. What are the changes of the risk becoming a reality? - the identification, analysis, and economic control of those risks which can threaten the assets or earning capacity of an enterprise
Risk (General)
Possibility of an unfortunate occurrence, possibility of oss, chance of gain
Insurance
Transferring of risk
Risk (three ways in market place)
- Peril or contingency that is insured - fire, theft, etc… 2. Liability - Could be a factory or manufacturer’s liability to the public 3. Underwriter defining risk - wide definition encompassing property/thing and range of contingencies or scope of cover
Attitude to Risk
Risk seeking, Risk averse
Risk Management (Why is it important?)
- Reduces potential loss by identifying and managing hazards 2. Gives shareholders greater degree of confidence that the company is managing its risks. Stock market companies - legal requirement to identify all significant risks to which it is expose and explain this in the annual report and also how it is managed. 3. Disciplined approach to quantifying risk
Individuals (risk management)
Different approach to companies - usually do it because compulsory (car/mortgage, etc..) - Even when there is a choice, unlikely to use scientific methods - decided by risk attitude - If they have a lot of assets, then may take more formalized approach - “High net worth individuals”
Risk Management (Process)
Should be a continuous and developing process embedded in firm’s strategy - Risk identification –> Risk Analysis –> Risk Control
Risk Identification
Discovering the threats to it that may already exist and the potential threats that may exist in the future. Not all may be insurable but must be managed. i.e. petty theft cannot be insured, but can be managed by setting aside funds to cover cost - Can also bring in an insurer to identify risks with reports/surveys
Risk Analysis
examine past data to evaluate or analyse risk - past loss pattern to predict what is likely to happen with individuals/property in this category - look at many of the same elements when considering rating of risk
Risk Control
Reduce or eliminate risk - Elimination most effective but maybe costly or impracticable (outsourze activity) - Look at whether the cost of doing so (eliminating risk) is reasonable compared to cost of feared event
Risk Control (2 distinct aspects)
- Physical control measures - (locks, antitheft) 2. Financial control - transferring risk
How Insurers or other similar bodies help control risk
- Imposing requirements/making recommendations to improve risk 2. Survey/report 3. Offer premium reduction as incentive for risk improvements
Loss Prevention Council (LPC), Fire Protection Association (FPA) and other similar bodies
Help by 1. researching new materials and methods of construction 2. Providing rules that set standards 3. Report on new industrial process and machinery 4. provide rules for construction/ilnstallation
Categories of Risk
- Financial and Non-Financial 2. Pure and Speculative 3. Particular and Fundamental
Non-Financial Risk
Cannot be measured in financial terms - May have a financial aspect incidentally - Real risk arises from decisions and actions motivated by other considerations - i.e. family heirloom - may have sentimental value but can only be insured for its intrinsic value
Financial Risk
Can be measured in financial terms - usually compensatory - usually value placed on loss is not determined in advance with a few exceptions such as personal accident/sickness/life (Known as benefit policies)
Pure Risk
Can be insured - Where there is a possibility of a loss but not of gain - i.e. traveling home in your car - best case scenario is to make it safely (break even)
Speculative Risk
Not insurable - gambling, investments, starting a new business, etc..
Fundamental Risk
Usually not insured because risk occurs on too vast a scale - earthquake - in a earthquake prone area, or war, or economic recession - (usually social, economic, political or natural causes) - Different from speculative risk (won’t insure on principle), but here it is a lack of willingness or capacity on part of insurers (although it is sometimes insured)
Particular Risk
Localized or even personal in cause and effect - cause may be widespread (storm) but effect is localized or even related to an individual
Features of risk that can be insured
- Event must be unforeseen 2. Must be insurable interest 3. Must not be against public policy
Insurable interest (Features of risk that can be insured)
legally recognized financial relationship between the insured and the object or liability
Public Policy (Features of risk that can be insured)
Cannot be against the law or what society considers the right or moral thing - encourage people to break the law
