CHAPTER 1: THE NATURE OF RISKS - created from Mind Map

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Types of Pure Risk

Concepts of risk

Concepts of perils, hazards and loss

Probability Theories

Classifications Of Risk

Personal risk

Property Risks

Liability Risks

Risk of premature death

Risk of old age

Risk of poor health

Risk of unemployment

Direct loss

Indirect loss

Extra expenses

Risk of being sued because of neglect, malpractice, or causing wllful injury either to another person or to someone else's property

Possibility of financial loss if you are found liable, or the financial loss incurred just defending yourself, even if your are not found lialble

The concepts

Defination of risk

Risk and Chance

Possibility of adverse deviation from a desired outcome that is expected or hoped for

Risk implies negative consequences and results

Risk threatens or limits the ability of a community or non-profit organization to achieve its mission

Unpredictable and unexpected events

world is full of risk

Possibility of loss

Unpredictable

Combination of Hazards

Uncertainty of loss

Possibility of an unfortunate occurence

Risk

Chance

Uncertainty about an outcome of an event

The outcome normally negative

Some doubt or uncertainty about the outcome of an event

The outcome normally a positive

LOSS: A reduction or disappearance of economic value

PERIL: Is a cause of loss

HAZARD: A condition that increases the chance of loss

Property Damage

Loss of use

Medical Expense

Court

Explosion

Motor Accident

Illness

Negligence

Explosive

Poor Break

Poor Health

3 Types of Hazard

Carelessness

Physical Hazard

Moral Hazard

Morale Hazard

A Priori Probability

Empirical Probability

Judgemental Probability

Determined when the total number of possible events are known

Example: the probability of getting a six on a roll of dice is 1/6

This concept has a limited practical application in the study of risk because situations where a number of possible outcome are known are very rare.

Deteremined on the basis of historical data

Example: road accidents

The underlying concepts that makes it possible for empirical probability to be measured accurately is that as the number of observations increases, the predicted loss tends to approach the actual loss ( the law of large numbers

Determined based on the judgment of the person predicting the outcome

It is used when there is lack of historical data or credible statistics

Example: Astronaut program by malaysia. The insurance company in Malaysia uses judgmental probability due to lack of credible statistics

Fundamental risk

Particular risk

Pure risk

Speculative Risk

Financial Value Risk

Non Financial Value Risks

Affects the entire economy or large number of Persons/groups within the economy

Affects the society in general and cannot be controlled

Example: Tsunami, earthquake

Those future outcomes that we can partially control

Arises from individual decesions

Example: to further study or to drive a car

There are possibility of loss or no loss

Example: to pass or to fail the exam

Possibility of loss, no loss or profit

Example: investment

Outcome can be measured by monetary terms

Example: Property damages can be measured in terms of loss or profit

Outcome cannot be measured by monetary terms

Example: Choice of career will affect ones quality of life