Chapter 1- Principles of Risk Management and Insurance

Risk

Uncertainty concerning the occurrence of a loss.

Loss exposure

Any situation or circumstance in which a loss is possible, regardless of whether a loss occurs.

Objective risk

The relative variation of actual loss from expected loss.

Subjective risk

Uncertainty based on a person’s mental state or condition.

Peril

Cause of the loss

Hazard

Condition that increases the chance of loss.

Physical hazard

Physical condition that increases the frequency or severity of loss.

moral hazard

Dishonesty or character defects in an individual that increase the frequency or severity of loss.

Attitudinal hazard (morale)

Carelessness or indifference to a loss, which increases the frequency or severity of a loss.

Legal hazard

Refers to characteristics of the legal system or regulatory environment that increases the frequency of losses.

Pure risk

A situation in which there are only the possibilities of loss or no loss

Speculative risk

A situation in which either profit or loss is possible. gambling.

Diversifiable risk

Affects only individuals or small groups. It can be reduced or eliminated by diversification.

non-diversifiable risk

Affects the entire economy or large numbers of people or groups within the economy. It is also called fundamental risk.

systemic risk

is the risk of collapse of an entire system or market due to the failure of a single entity or group of entities that can result in the breakdown of the entire financial system.

Enterprise risk

Its is a term that encompasses all major risks faced by a business firm.

Personal risks

Risks that directly affect an individual or family. They involve the possibility of a loss or reduction in income, extra expenses or depletion of financial assets.

Risk control

refers to techniques that reduce the frequency or severity of lossesloss

reduction