risk identification and risk probability

1. • RISK IDENTIFICATION OF RISK PROBABILITY
CHAPTER 3

2. RISK EVALUATION AND ASSESSMENT
Objectives
 Use statistical application in risk
identification
 Differentiate between probability and
possibility of loss
 Evaluate risk using various risk
identification techniques
 Apply the risk identification tool for risk
assessment
3

3. ATTITUDE TOWARDS RISK
• RISK TAKER---- WILL DECIDE ON THE OPTION
THAT WILL EITHER BRING HIGHER RETURN
OR ALTERNATIVELY, THE POSSIBILITY OF A
LOSS
• RISK ADVERSE--- ATTITUDE IS TRYING TO
PLAY SAFE, THE OUTCOME OF HIS DECISION
MUST ALWAYS RESULT IN NO LOSS

4. EXPECTED VALUE (EV)
EXPECTED VALUE(EV)
IS THE SUMATION OF EACH OUTCOME OR THE WEIGHTED PAYOFFS
FOR EACH ALTERNATIVE BASED ON THE POSIBILITY OF EACH
OCCURRENCE.
EV = Σpixi………………….(1)
pi = probability
xi = value of random variable

5. Example 1
Insurance Company A and B shows that
10,000 vehicles insured. There is a 50% and
20% probability of claim occur for company A
and B respectively. Calculate the expected value of
accident claims.
EV(A)= 0.5 x 10000 = 5000 claims
EV(B)= 0.2 x 10000 = 2000 claims
Which company is more risky?

6. STANDARD DEVIATION (SD)
STANDARD DEVIATION…….
• DEGREE OF DEVIATION FROM THE
PREDICTION OR THE AVERAGE OR THE
EXPECTED VALUE.
• SD < 1 LESS RISKY
• SD > 1 MORE RISKY
• Eg. The SD is 1.5 then the undertaking is
considered to be 50% risky.

7. PROBABILITY OF LOSS AND MAGNITUTE
(SIZE) OF LOSS
EV = Σpixi = PL x ML ……………………….…..(2)
PL = Probability of loss
ML = Magnitude (size) of loss
Example 2
Insurance Company A and B shows that they have the magnitude of
Loss RM1,000,000 and RM3,000,000 respectively. There is 50% and 20%
probability of loss occur for company A and B respectively. Calculate the
probability of loss for both company.
EV(A) = 0.5 x RM1,000,000 = RM 500,000
EV(B) = 0.2 x RM 3,000,000 = RM 600,000
Which is more risky?

8. DECISION THEORY IN RISK MANAGEMENT
– Decision making under certainty----The occurance
of the risks is known with certainty and there is only one
option possible
– Decision making under risk----More than one
possible option exists and probability calculation is available
for each option
– Decision making under uncertainty---More than
one possible option available but the probability calculation is
not possible for all options and nothing is known about the
chance of occurance.

9. TECHNIQUES FOR FORCASTING RETURNS ON
INVESTMENT
USING EXPECTED VALUE CALCULATION
Option Return(%) Prob Payoff
1 0 1.0 RM100,000
2 6 1.0 RM106,000
3 15 or 3 0.5 RM115,000 or RM103,000
4 10, 20 or 30 0.2 RM110,000 or RM120,000 or
RM130,000

10. CALCULATION OF EXPECTED VALUE OF ALL THE
OPTIONS
OPTION1: EV1=1.0 x RM100,000 = RM100,000
OPTION2: EV2=1.0 x RM106,000 = RM106,000
OPTION3: EV3=(0.5 x RM115,000) + (0.5 x RM103,000)
= RM109,000
OPTION4: EV4=(0.2 x RM110,000) + (0.2 x RM120,000)
+ (0.2 x RM130,000)
= RM 72,000

11. •
CHAPTER 9

12. Choice of Option
Risk Adverse? Why?
Risk Taker? Why?
What is your choice?

13. ASSESSMENT OF PERSONAL LOSS
PERSONAL LOSS----LOSSES ARISING
FROM HUMAN LIFE CONTINGENCIES
• PEOPLE ARE THE MOST IMPORTANT ASSET THAT NEEDED PROTECTION
• ORGANIZATION SUFFER PERSONAL LOSS DUE TO:
– DEATH, DIABILITY, RETIREMENT, RESIGNATION, DISCHARGE
– REPLACEMENTN INCUR COST
– TRAINING ALSO INVOLVE COST
– LOSS VALUE OF THE PERSON’S SERVICES
– ANY EXPENSES CAUSED BY THAT LOSS

14. POTENTIAL FINANCIAL EFFECT ARISING FROM
PERSONAL LOSS
• LOSS OF PROFITS.
Eg. Sale Adversely Affected
• LOSS OF FUTURE INCOME.
Eg.Revenue adversely affected
• LOSS OF FUTURE EARNING,
Eg.Dissatisfied employees leave organization and establish
competing firm offering the same goods or services

15. PROPERTY LOSS
PROPERTY LOSS---DIRECT OR INDIRECT
LOSSES TO PROPERTIES OWNED, LEASED
OR IN CUSTODY
DIRECT PROPERTY LOSS
• EARTHQUAKE, FIRE, FLOOD
• REPAIR TO MOTR VEHICLE DAMAGED IN A COLLISION
• DAMAGE TO SAFETY BAXES AFTER A BREAK-IN AT THE BANK
• GENERALLY EASY TO VALUE AND QUANTIFY
• CREDIT RISK, INVESTMENT RISK, CURRENCY EXCHANGE RISKS THAT
HAVE A DIRECT CONSEQUENCE OR DECREASE ON THE BANKS ASSETS

16. INDIRECT PROPERTY LOSS
• LOSS OF OPERATING EFFECTIVENESS OR
EFFICIENCY
• MACHINE BREAKDOWN DECREASE
PRODUCTION INTERUPTION OF SALE

17. METHODS OF VALUATION PROPERTY LOSSES
BOOK VALUE OR HISTORICAL COST
THE VALUE REPORTED IN THE FINANCIAL
STATEMENT FOR THE ASSETS OF THE
ORGANIZATION, WHICH IS ALSO THE PURCHASE
PRICE OR THE ORIGINAL COST LESS
ACCUMULATED DEPRECIATION.

18. MARKET VALUE
• CAN BE ESTIMATED BASED ON PRICE AT
WHICH EQUIVALENT PROPERTIES HAVE
BEEN TRADED MOST RECENTLY
• THE VALUE DETERMINE BY DMAND AND
SUPPLY

19. REPLACEMENT COST NEW
THE COST OF BRAND NEW
PROPERTY THAT IS IDENTICAL OR
MATCHED THE FEATURES TO THE
DAMAGED PROPERTY

20. REPLACEMENT COST NEW LESS
DEPRECIATION AND OBSOLESCENCE
REPLACEMENT COST MINUS
PHYSICAL DEPRECIATION AND
ECONOMIC OBSOLESCENE

21. LIABILITY LOSS
LIABILITY LOSS---OCCUR AS A
RESULT OF LEGAL ACTIONS TAKEN
BY AGGRIEVED PARTIES DUE TO
ACTIONS OR INACTIOS OF THE
ORGANIZATION RESULTING IN LOSS
TO THEIR PERSONS OR PROPERTIES

22. THREE SOURCES THAT RESULTS IN A
LIABILITY LOSS
1. THE QUANTUM OF DAMAGES AWARDED BY
THE COURT TO THE CLAIMING PARTY
2. THE LEGAL DEFENSE COSTS
3. THE COST OF PREVENTIVE ACTIONS TAKEN
TO PREVENT POTENTIAL LEGAL LIABILITY
SUITS

23. LEGAL LIABILITY
• UNDER COMMON LAW OR
STATUTORY LAW AS A RESULT OF
WRONGFUL ACTIONS ARISING
UNDER CONTRACT LAW, TORT
LAW AND CRIMINAL LAW

24. TYPES OF LAW
PUBLIC LAW---RELATES TO THE
POWERS AND RIGHT OF GOVERNMENTS
AND THE RELATIONSHIPS OF TO
INDIVIDUALS AND ORGANIZATIONS.
Eg. EPF, INCOME TAX, OSHA, ETC.

25. PRIVATE LAW----GOVERNS
INDIVIDUALS AND ORGANIZATIONS AND
THEIR RELATIONSHIPS TO ONE ANOTHER
Eg. Tort Law, Contract Law, Property Law,
Agency Law, Sales Law, Partnership
Law and Incorporation Law

26. CRIMINAL LAW
CRIMINAL LAW---RELATES TO
BREACH OF DUTY OWED TO SOCIETY
IN GENERAL WHERE VIOLATORS ARE
PROSECUTED BY THE STATE IN THE
NAME OF ALL ITS PEOPLE.

27. CIVIL LAW
CIVIL LAW---RELATES TO BREACH
OF DUTY OWED TO A PARTICULAR
OR INDIVIDUAL WHO FILE A LEGAL
IN ORDER TO ATTAIN AN
APPROPRIATE LEGAL REMEDY

28. LAW OF TORT
A TORT IS A CIVIL WRONG FOR WHICH
THE COURT WILL PROVIDE REMEDY IN
THE FORM OF DAMAGES USUALLY,
MONETARY IF THE AGGRIEVED PARTY
COULD SUCCESSFULLY PROCECUTE HIS
CASE IN COURT.

29. INTENTIONAL TORTS
PLANNED ACTIONS OR CONDUCT THAT
RESULT IN A LOSS OR DAMAGE TO THE
AGGRIEVED PARTY.
• TRESPASS—ENTRY EITHER IN PERSON OR
THING INTO LAND IN THE POSSESSION OF
ANOTHER WITHOUT PERMISSION.

30. • CONVERSATION---A WRONGFUL
RETENTION OF PERSONAL PROPERTY
BELONGING TO ANOTHER AND THE
PENALTIES ARE THE SAME AS TRESPASS
• ASSAULT---VIOLENT OR AGGRESSIVE
CONDUCT OR WORD WITOUT CONTACT TO A
PERSON, FOLLOWED BY REAL THREATS AND
FEEL TREATENED

31. • BATTERY---AN EXTENTION OF ASSAULT IS
CONSIDERED BATERRY WHEN CONTACT IS MADE TO
THE PERSON OF ANOTHER WITHOUT CONSENT OF THE
INNOCENT PARTY
• FALSE IMPRISONMENT---THE UNLAWFUL
IMPOSITION OF RESTRAINT ON ANOTHER’S FREEDOM
OF MOVEMENT.
• ANY RESTRICTION WHICH PREVENTS A PERSON
LEAVING A PLACE AMOUNTS TO FALSE
IMPRISONMENT.

32. • DEFARMATION---CONSISTS OF
PUBLISHING A DEFAMATORY STATEMENT
WHICH REFERS TO AN IDENTIFIABLE
CLAIMANT, WITHOUT LAWFUL
JUSTIFICATION
Eg. Publication, Statement, picture,
music.etc that triggered adverse
felling or judgement against other.

33. UNINTENTIONAL TORTS
• NEGLIGENCE---OCCUR WHEN SOMEONE
FAILS TO EXERCISE THE DEGREE OF CARE THAT
IS REASONABLE UNDER THE CIRCUMSTANCES.
• THE ACTS IS WITOUT INTENTION TO INVADE,
BUT MERELY FAILS TO TAKE DUE CARE OF
ANOTHER PERSON’S RIGHT.

34. • DEFENSES AGAINST CHARGES FOR
NEGLIGENCE
Eg. Privilege, Immunity of Government,
Charities, etc

35. • STRICK OR ABSOLUTE LIABILITY
• IMPOSED BY LAW WITHOUT REGARD TO THE
INTENT OF THE WRONGDOER’S ACTION
• LIABILITY WITHOUT PROVE OF FAULT
• Eg. Keeping wild animal as pet, storage of
dangerous products, inherently dangerous
activities, drug pusher & dealer, etc