Risk, Classification of Risk, Financial Risk, Non-Financial Risk, Fundamental Risk, Particular Risk, Pure Risk, Speculative Risk, Static Risk, Dynamic Risk, Subjective Risk, Objective Risk, Sources of Risk, Personal Risk, Property Risk, Liability Risk, Financial Risk, Hazards, Physical Hazard, Moral Hazard, Morale Hazard, Legal Hazard, Step involved in Risk Management Process

2. RISK
RISK
 A situation where the probability of an outcome could be
determined
 Uncertainties in regard to cost, loss or damage.
 Financial loss or non-financial loss
 Life risk and business risk

3. UNCERTAINTY
UNCERTAINTY
 Lack of complete certainty
 Existence of more than one possibility
 True outcome or state or result or value not known
DEFINITION
According to Frank H. Knight, “Risk refers to a situation where the
probability of an outcome could be determined, and therefore, the
outcome could be insured against. Uncertainty by contrast, referred
to an event whose probability could not be known”.

4. DIFFERENCE
BETWEEN
RISK
&
UNCERTAINTY
S.No. BASISOF
DIFFERENCE
RISK UNCERTAINTY
1 Basis of
Measurement
By probability
(Combination of perils
and hazards)
By degree of relief
2 Situation Real world State of mind
3 Calculation Actuarial probability
can be calculated in
advance
Uncertainty not
measureable because it
is accidental
4 Insurable Risk of fire, theft can
be insured
Unforeseen risk cannot
be insured

5. CLASSIFICATIONOF
RISK

6. CLASSIFICATION
OF
RISK
 Result of an unforeseen event or its happening
 Business world is dynamic and full of risk of uncertainties
 Future is unpredictable and full of uncertainties
 Risk exist till the moment the product reaches the consumer.
 Risk can be classified into:
a. Financial and Non-Financial Risk
b. Fundamental and Particular Risk
c. Pure and Speculative Risk
d. Static and Dynamic Risk
e. Subjective and Objective Risk

7. FINANCIAL
&
NON-
FINANCIAL
RISK
FINANCIAL RISKS
• Any risk concerned with financial loss
• Increase in expense or decrease in earning capacity
• Example: death, disability, major surgery, illness, liability for
injuries to others, burglary, destruction of house and contents, car
accident, professional liability etc
NON FINANCIAL RISK
• Any risk not concerned with financial consequences

8. FUNDAMENTAL
&
PARTICULAR
RISK
FUNDAMENTAL RISK
• Losses that occur from the causes or problems relating to changed
of economic, social, cultural and political environment
• Group risk
• Severely affect the whole population
• Examples: unemployment, war, inflation, earthquakes, floods,
drought, famine etc.
• Conditions beyond the control of the individuals
• Social insurance and government transfer program
• Insurance and re-insurance available for certain losses
• Government has control over economic risks

9. CONTI….
PARTICULAR RISK
• Losses that occur resulting out of individual events
• Examples: burning of a house, robbery of a bank etc.
• Individual’s own responsibility

10. PURE
&
SPECULATIVE
RISK
PURE RISK
• Situation that involve the chances of loss or no loss
• Example: damage to property by fire, flood, premature deaths etc.
• Possibility of loss surrounding the ownership of property
• Pure risk can be categorized as personal, property and legal risk
1. Personal risk: affect someone directly. Example: illness,
disability or death
2. Property risk: both direct loss and consequential losses.
Example: house fire, car theft etc.
3. Legal risk: sued because of negligence, malpractice, willful
injury to another person or property etc.
• Most personal, property, legal risks are insurable

11. CONTI…..
SPECULATIVE RISK
• Uncertainty about an event that could produce either a profit or a
loss
• Possibility of gain
• Examples: business ventures, investment decisions etc
• Uninsurable
• Greater frequency of loss than a pure risk
DIFFERENCE BETWEEN PURE RISK & SPECUALTIVE RISK
S.NO. PURE RISK SPECUALTIVE RISK
1 Uncertainty as to whether loss
will occur. Only potential loss
Uncertainty about an event that
could produce either a profit or
loss
2 Ordinarily insurable Not ordinarily insurable
3 Pooling arrangement is
possible
Pooling arrangement is not
possible

12. STATIC
&
DYNAMIC
RISK
STATIC RISK
• Losses resulting from the destruction of an asset or changes in its
possession
• Result of dishonesty or human failure
• No changes in the economic environment
• Not a source of gain to the society
• Suitable for insurance
• predictable

13. CONTI….
DYNAMIC RISK
• Losses concerned with financial loss
• For example: changes in the price level, consumer wants and
needs, income, output and development of technology
• Affects the public and society
• Adjustment to misallocation of resources
• Less predictable

14. CONTI….
DIFFERNCE BETWEEN STATIC RISK & DYNAMIC RISK
S.NO. STATIC RISK DYNAMIC RISK
1 Losses , no changes in the
economic environment
Losses, changes in the economic
environment
2 Easily predictable Not predictable
3 Treatment by insurance Not suited to treatment by
insurance
4 Not a source of gain to
society
Benefit to the society

15. SUBJECTIVE
&
OBJECTIVE
RISK
SUBJECTIVE RISK
• Mental state of an individual
• Experience doubt or worry about the outcome of an event
• Psychological uncertainty
OBJECTIVE RISK
• Observable
• Measureable
• Variation of actual from expected experience

16. SOURCESOF RISK

17. SOURCES
OF
RISK
 The sources of Risk are
1. Personal Risk
2. Property Risk
3. Liability Risk
4. Financial Risk

18. PERSONAL
RISK
PERSONAL RISK
• Uncertainties arise out of human element
Risk of premature death
Risk of poor health
Risk of temporary or permanent disability
Risk of insufficient income during retirement

19. PROPERTY
RISK
PROPERTY RISK
• Non-living things owned by persons
• Examples: real estate, land, building, vehicles, machines etc.
• Loss of the property, loss of use of the property and additional
overhead expenses

20. LIABILITY
RISK
LIABILITY RISK
 Unintentional injury of other persons or damages to their property
 Negligence or carelessness
 Entities that use own or real property
 Actions that cause harm or injury to someone or his property
 Actions that pollute the environment or vilate personal rights of
employees
 Categories of liability risk:
1. Public Liability Risk
2. Product Liability Risk
3. Third Party Liability Risk
4. Risk relating to Professional Indemnities
5. Other Liability Risk

21. FINANCIAL
RISK
FINANCIAL RISK
 Speculative in nature
 Impact on firm’s earnings
 Credit risk, foreign exchange risk, commodity risk, interest rate
risk etc
 Problems associated with pure risk

22. INSURER
POINT
OF
VIEW
INSURER POINT OF
VIEW
INSURABLE
RISK
UNINSURABLE
RISK

23. INSURABLE
RISK
INSURABLE RISK
 After the selection process can be carried out
 Different terms and conditions for different policyholders
 IR is classified into:
1. Standard Risk – mix of good and bad lives
2. Super-Standard Risk (Preferred Risk) – lesser risk than standard
risk.
3. Sub-Standard Risk – above the standard risk and below the
uninsurable risk. Additional premium charged

24. UNINSURABLE
RISK
UNINSURABLE RISK
 Reasons for uninsurable risk:
1. Premium will be high
2. Unknown risk cannot be insured

26. HAZARD
HAZARD
 Peril – cause of loss
 For example: House burns because of fire, fire is the peril
Car is damaged in a collision with another car,
collision is the peril
 Common perils – fire, earthquake, theft, burglary, windstorm, hail,
lightening, tornados etc
 Hazard – condition that create or increase the chance of losses
from the above perils or under a given condition

27. CLASSIFIACTION
OF
HAZARDS
HAZARDS
PHYSICAL
HAZARD
MORAL
HAZARD
MORALE
HAZARD
LEGAL
HAZARD

28. PHYSICAL
HAZARD
PHYSICAL HAZARD
 Physical condition that increases the chance of loss from any peril
 Condition stemming from the material characteristics of an object
 For example: dry forest (fire), earth faults (earthquakes), oil rags in
a firms storage (fire)
 May or may not be under human control
 CHARACTERISTICS OF PHYSICAL HAZARD:
1. Related to the object
2. Within the scope of assessment
3. Present everywhere
4. Easier to handle and control

29. MORAL
HAZARD
MORAL HAZARD
 Increase in probability because of dishonesty of the insured person
 Individual’s mental attitude
 Intentional actions to cause a loss or increase its severity
 For example: manager who purchases fire insurance on a factory
full of unprofitable, out of date equipment for the purpose of
incentives
 Present in all forms of insurance
 Difficult to control
 Increases unfair claims and payments
 Harmful for insurance business

30. CONTI….
 CHARACTERISTICS OF MORAL HAZARD:
1. Related with the person or insured
2. Difficult to handle and control
3. Only present in some cases
4. Difficult to put through an assessment

31. MORALE
HAZARD
MORALE HAZARD
 Mental attitude of a careless or accident-prone person
 For example: leaving a door unlocked, driving the insured car
carelessly etc
 Subconscious desire for a loss may exist
 Circumstances may cause someone to behave differently

32. LEGAL
HAZARD
LEGAL HAZARD
 Legal system or regulatory environment
 Increases the frequency or severity of losses
 Laws or regulations that force insurance company to cover the
risks
 For example: coverage for alcoholism in health insurance

33. RISK MANAGEMENT
PROCESS

34. RISK
MANAGEMENT
PROCESS
RISK MANAGEMENT PROCESS
 The process that is used to systematically manage risk exposures
is known as risk management
 Steps involved in risk management process:
1. Risk Identification
2. Assessment of Risk
3. Potential RiskTreatment
4. Create a Risk Management Plan
5. Implementation

35. FLOW
CHART
1. RISK
IDENTIFICATION
SOURCEANALYSIS
PROBLEMANALYSIS
3. POTENTIAL
RISKTREATMENTS
AVOIDANCE
REDUCTION
RETENTION
TRANSFER
2. ASSESSMENT OF
RISK
4. RISK
MANAGEMENT
PLAN
5. IMPLEMENTATION

36. 1. RISK
IDENTIFICATION
1. RISK IDENTIFICATION
 First step to identify the potential risk
 Risk – events when triggered, causes problem
 Risk identification starts with
(a) Source Analysis – internal or external sources
Example: stakeholders of a project, employees of a company,
weather over an airport etc.
(b) Problem Analysis – identify threats
Example: threat of losing money, threats of abuse, threats of
accident etc.

37. CONTI….
COMMON METHODS FOR RISK IDENTIFICATION
 Objective-based risk identification
 Scenario-based risk identification
 Taxonomy-based risk identification
 Common-risk checking
 Risk charting

38. 2.
ASSESSMENT
OF
RISK
2. ASSESSMENTOF RISK
 Assess – potential severity of loss and the probability of
occurrence
 Measurement – simple or impossible
 Risk assessment – produce information for the management of
the organization
 Several theories and attempts to quantify risks
 R = RO x IE (RO – Rate of Occurrence & IE – Impact of the Event)
 Less dependent – formula used & more dependent – frequency
and performance of risk assessment

39. 3. POTENTIAL
RISK
TREATMENT
3. POTENTIAL RISKTREATMENT
 Four major categories of risk
1. RiskAvoidance (elimination)
2. Risk Reduction (mitigation)
3. Risk Retention (acceptance & budgeting)
4. RiskTransfer (insurance or hedging)

40. 4. RISK
MANAGEMENT
PLAN
4. RISK MANAGEMENT PLAN
 Applicable and effective security controls for managing risks
 For example: computer viruses

41. 5.
IMPLEMENTAION
5. IMPLEMENTATION
 Follow all of the planned methods
 Purchase insurance policies
 Review and Evaluation of the Plan

42. THANKYOU