Tuesday, April 11, 2017

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Understanding And Managing Risks

Understanding And Managing Risks

Risk is the potential of loss (an undesirable outcome, however not necessarily so) resulting from a given action, activity and/or inaction. The notion implies that a choice having an influence on the outcome sometimes exists (or existed). Potential losses themselves may also be called "risks". Any human endeavor carries some risk, but some are much riskier than others.

Peril is defined as the cause of loss. Thus, if a house burns because of a fire, the peril, or cause of, loss, is the fire. Some common perils that result in the loss or destruction of property include fire, cyclone, storm, landslide, lightning, earthquakes, theft, and burglary.

Insurance
[Post Image Courtesy of Stuart Miles at FreeDigitalPhotos.net]

Factors, which may influence the outcome, are referred to as hazards. Hazard can be physical or moral or Morale.

(a) Physical hazard: Physical hazard relates to the physical characteristics of the risk, such as the nature of construction of a building, security protection at a shop or factory, or the proximity of houses to a riverbank.

(b) Moral hazard: Moral hazard concerns the human aspects which may influence the outcome. Moral hazard is dishonesty or character defects in an individual that increase the chance of loss.

(c) Morale hazard: This usually refers to the attitude of the insured person. Morale hazard is defined as carelessness or indifference to a loss because of the existence of insurance.

With regards insurability, there are basically two categories of risks;

(a) Speculative or dynamic risk: Speculative (dynamic) risk is a situation in which either profit OR loss is possible. Examples of speculative risks are betting on a horse race, investing in stocks/bonds and real estate

(b) Pure or static risk: Pure (static) risk is a situation in which there are only the possibilities of loss or no loss, as oppose to loss or profit with speculative risk.

Fundamental risks affect the entire economy or large numbers of people or groups within the economy while on the other hand; particular risks are risks that affect only individuals and not the entire community. Examples of fundamental risks are high inflation, unemployment, war, and natural disasters such as earthquakes, hurricanes, tornadoes, and floods and Examples of particular risks are burglary, theft, auto accident, dwelling fires.

Subjective risk is defined as uncertainty based on a person's mental condition or state of mind while objective risk is defined as the relative variation of actual loss from expected loss.

Static risks are risks connected with losses caused by the irregular action of nature or by the mistakes and misdeeds of human beings while Dynamic risks are risks associated with a changing economy.

Risk management process ensures that an organization identifies and understands the risks to which it is exposed. Risk management also guarantees that the organization creates and implements an effective plan to prevent losses or reduce the impact if a loss occurs.

Risk Management Comprises of mainly three steps

(a) Risk Analysis:

(i) Risk Identification

(ii) Risk Assessment

(b) Risk Planning

(c) Risk Controlling

Insurance and reinsurance are both forms of financial protection which are used to guard against the risk of losses. Losses are guarded against by transferring the risk to another party through the payment of an insurance premium, as an incentive for bearing the risk. Insurance and reinsurance are similar in concept even though they are quite different to each other in terms of how they are used.

Insurance Law And Practice - ICSI

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