Introduction to Risk management and insurance. Insurance Risk Management is the assessment and quantification of the likelihood and financial impact of events that may occur in the customer's world that require settlement by the insurer; and the ability to spread the risk of these events occurring across other insurance underwriter's in the market.

1. R i s k M a n a g e m e n t
&
I n s u r a n c e

2. I n t r o d u c t i o n

3. CHAPTERS
1. Introduction to RISK
2. Risk Management
3. INSURANCE: An introductory aspects
4. INSURANCE: Fundamentals of insurance contract
5. INSURANCE: Analysis of insurance contract
6. TYPES of insurance: Life and health insurance
7. TYPES of insurance: None life insurance
8. The insurance business in ETHIOPIA
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8. CHAPTER – ONE
NATURE OF RISK AND RELATED CONCEPTS
RISK MANAGEMENT &
INSURANCE

9. Agenda
1.1. Definitions of Risk
1.2. Risk Vs Uncertainty, and chance of loss
1.3. Risk, peril and hazard
1.4. Classes of Risk
1.5. Types of pure risk
1.5.1. Personal pure risks
1.5.2. Property pure risks
1.5.3. Liability pure risks
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10. Learning Objectives
After studying this chapter you should be able to:
1. Define the term risk
2. Distinguish risk from uncertainty .
3. Distinguish risk from Chance of Loss.
4. Discuss on the difference between risk, hazard and peril.
5. Recognize the different classes of hazard
6. Classify risk in to different class.
7. Describe the category in to which pure risk may be subdivided
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11. 1.1. Meaning of Risk
 There is no single and commonly agreed definition for the
term risk
 But there are common elements in all the definitions:
Indeterminacy and Loss.
The issue of Indeterminacy
 When risk is said to exist, there must always be at
least two possible outcomes
 The outcome must be in question.
The issue of Loss.
 of the possible outcomes one must be
undesirable.
 This may be a loss or it may be a gain smaller than
the gain that was possible.
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12. 1.1. Meaning of Risk (Cont…)
Based on the above concepts risk can be defined as:
 “a condition of the real world in which there is
an exposure to adversity”
 “Uncertainty Concerning the Occurrence of Loss”
 “a condition in which there is possibility of an
adverse devotion from a desired outcome that
is expected or hoped for”
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13. 1.1. Meaning of Risk (Cont…)
Example:
1. Starting a business venture
2. Gambling
3. .
4. .
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14. 1.2. RISK, UNCERTAINITY AND CHANCE OF LOSS
UNCERTAINTY AND ITS RELATION WITH RISK
 “uncertainty refers to a state of mind characterized
by doubt, based on lack of knowledge about what
will or will not happen in the future. ”
 We don’t even know weather loss exists or not
RISK AND CHANCE OF LOSS
 “Chance of loss is the percentage expression of
only the loss part of a risky situation”
 “Chance of loss is the probability that an event
which will cause a loss will happen.”
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15. 1.3. DISTINCTION BETWEEN RISK, PERIL AND HAZARD
Peril: peril is defined as the cause of loss
 Any activity or material or condition that cause a loss is considered as peril.
EXAMPLES
 If your home is damaged by fire the peril or cause of loss is fire
 If your property is lost because of theft the cause of loss, peril, is theft.
 The following are the common perils that may cause property damage:
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 Fire
 Tornado
 Theft & burglary
 Lightening
 Wind storm
 Earthquake
 Flood
 War
 Hail e.t.c.

16. 1.3. DISTINCTION BETWEEN RISK, PERIL AND HAZARD
Hazard:
 Is a condition that increase or stimulates the chance of loss
arising out from a give peril.
 Physical hazards
 Moral hazard
 Morale Hazard/ Attitudinal Hazard
 Legal Hazard
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17.  Physical hazards:
 are physical conditions that increase the chance of loss ( Eg. icy
roads, defective wiring, defective locking)
 Moral hazard:
 is dishonesty or character defects or evil tendency of an
individual, that increase the chance of loss (Eg. intentional firing of
property, faking accidents, inflating claim amounts)
 Morale Hazard:
 is carelessness or indifference to a loss because of the existence
of insurance (Eg. leaving keys in an unlocked car)
 Legal Hazard
 refers to characteristics of the legal system or regulatory
environment that increase the frequency or severity of losses
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Types of hazard

18. Agenda
1.4. Classes of Risk
1.4.1. Financial and non- financial
1.4.2. Objective and subjective
1.4.3. Static and dynamic risk
1.4.4. Fundamental and particular risk
1.4.5. PURE and speculative risks
1.5. Types of pure risk
1.5.1. Personal pure risk
1.5.2. Property pure risk and
1.5.3. Liability pure risk
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19. 1.4. Classes of risk
1.4.1. Financial and non- financial
1.4.2. Objective and subjective
1.4.3. Static and dynamic risk
1.4.4. Fundamental and particular risk
1.4.5. Pure and speculative risks
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20. 1.4.1. Financial and non- financial
Financial risks
 Adversity that involves financial/
monetary expense.
Example: In the risk of premature
death the ff are financial risk.
 Loss of salary of the diseased.
 Additional expense made for funeral and
the like expanses.
 These are those losses which did
not have a financial loss.
 It may be moral or psychological
losses.
Example: In the risk of premature
death.
 Loss of emotional grief of the diseased
 Loss of deceased's guidance
/counselling.
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Non-financial risks
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21. 1.4.2. Objective and subjective
Objective Risks
 The relative variation of
actual loss from the expected
loss.
OR=AL – EL
Example:
 uncertainty based on a
person’s mental condition
or state of mind.
 Impact of subjective risk
varies depending on the
individual.
 It differs from one to another
person based on experience,
culture, education e.t.c
Subjective risks
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22. 1.4.3. Fundamental and particular risk
Fundamental risk
 A risk that affects the entire economy or
large number of persons / groups
within the economy.
 Involves those losses that are
impersonal in origin and consequence.
 Examples:
High inflation, cyclical unemployment ,
War, drought, Earthquake, flood E.T.C
 A risk that effects only the
individuals not the entire
community.
 Involves those losses whose
origin and consequence is
personal.
 Examples:
car theft, bank robberies and
fire to a dwelling.
particular risk
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23. 1.4.4. Static and dynamic risk
Dynamic risks
 Dynamic risks are those risk that results
from changes in the economy.
 Causes by: change in economy:
 Change in price level
 Consumer test
 Income and output, and
 Technology
 Normally benefits the society over the long
run.
 Those risks that may occur even
if there was no change in the
economy.
 Causes by:
 irregular natural changes
 mistakes of human being,
 mistakes of human being.
 Do not benefits the society
Static risks
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24. 1.4.5. Pure and speculative risks
Speculative risks
 A situation where there is a
possibility of loss and also a
possibility of gain or profit.
Examples:
 Purchasing a share
 Doing a business for our own
 Gambling
 E.T.C
 pure risk is defined as a
situation in which there
are only the possibilities
of loss or no gain
Examples:
 Death
 Flood
 Earth quacks
 Theft, e.T.C
Pure risks
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25. 1.5. Types of pure risk
1.5. Types of pure risk
The major types of pure risk include:
1. Personal risks
2. Property risks and
3. Liability risks.
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26. 1.5.1. Personal pure risks
 Risks that directly affect an individual.
 Involve the possibility of:
 Complete loss or reduction of earned income
 Extra expenses, and
 Depletion of financial assets.
 There are four major typical personal risks:
 Risk of premature death
 Risk of insufficient income during retirement
 Risk of poor health
 Risk of unemployment
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27. Financial obligation:
1. Dependents to support.
2. Children to educate .
3. A mortgage to pay off.
Premature Death:
It is defined as the death of family head with outstanding
unfulfilled financial obligation.
Costs of Premature Death:
1. loss of the diseased earnings
2. Additional cost; like funeral exp.
3. Reduction of standard of living .
4. Other non-economic costs .
1. Premature Death:
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28. B. Risk of insufficient income during retirement
Also known as the risk of old age.
Unless we have:
1. Sufficient financial assets to be withdrawn
2. Social security schemes or a
3. Private pension plan
We will suffer a financial insecurity during
retirement
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29. C. Risk of poor health
It includes both:
 payment for medical bills &
 loss of total or partial income.
Example: A disease that causes heart surgery
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30. D. Risk of unemployment
 It is another major threat to financial security
 It can cause financial insecurity in three ways:
1. Total loss of income as a result of total unemployment
2. Partial loss of income as a result of partial unemployment
3. Exhaustion of past savings after a long period of withdrawal.
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31. 1.5.2. Property pure risks
 It is the risk of having property damaged or lost.
 Property risks are of two types:
 Direct loss:
 It is a financial loss that results from the physical damage,
destruction or theft of the property.
 Indirect loss /Consequential Loss :
 It is the financial loss that results indirectly from the
occurrence of the direct physical damage or theft.
 Example:
 A fire accident to a big “Manfg Firm”
 Damage to a hotel
 Damage to a residential dwelling {home}
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32. 1.5.3. Liability pure risks
 One will be held legally liable if he/she, or he’s/her property
say car, do something that result in bodily injury or property
damage to someone else.
 This may held you to pay damage in to three ways:
1. Monetary damage payment
2. Imprisonment
3. Death penalty
 Uncertainty concerning the occurrence of such a liability loss
is termed as liability pure risk or third party risk
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33. End!
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