The document outlines the concept of risk, distinguishing between risk and uncertainty, and defines various types of risks, including personal, property, and liability risks. It discusses methods for managing pure risk, such as avoidance, loss control, retention, and transfer through contractual agreements. Additionally, it categorizes hazards impacting loss severity and provides insight into pure and speculative risks.

1. Understanding Risk
Chapter 1 Undertaking Risk Intorduction to Insurance and Risk Management

2. Learning Objectives
To understand the concept of risk
To understand risk vs. Uncertainty
To understand types of risk
To understand classifying pure risks
To understand methods of handling pure risk
Chapter 1 Undertaking Risk
Intorduction to Insurance and Risk Management

3. The Concept of Risk
Risk is a condition in which there is a possibility of an
adverse deviation from a desired outcome that is expected
or hoped for
At its most general level, risk is used to describe any
situation where there is uncertainty about what outcome
will occur. Life is obviously risky
Chapter 1 Undertaking Risk
Intorduction to Insurance and Risk Management

4. Risk vs. Uncertainty
Uncertainty is often confused with the risk
Uncertainty can be perceived as opposite of certainty
where you are assure of outcome or what will happen
Accordingly, some weights or probabilities can be
assigned into risky situations but uncertainty, the
psychological reaction to the absence of knowledge lacks
this privilege
Chapter 1 Undertaking Risk
Intorduction to Insurance and Risk Management

5. Loss and Chance of Loss
Loss refers to the Act or instance of losing the detriment
or a disadvantage resulting from losing
Loss means being without something previously
possessed
Chapter 1 Undertaking Risk
Intorduction to Insurance and Risk Management

6. Perils
A peril refers to the cause of loss or the contingency that
may cause a loss
Chapter 1 Undertaking Risk
Intorduction to Insurance and Risk Management

7. Hazards
1. Physical Hazards – Property Conditions
2. Intangible Hazards – Attitudes and Culture
a) Moral Hazard – Fraud
b) Moral Hazard – Indifference
c) Societal Hazard – Legal and Cultural
Chapter 1 Undertaking Risk
Intorduction to Insurance and Risk Management

8. Types of Risks
Financial and Non-financial Risks
Individual and Group Risks
Pure and Speculative Risks
› Pure risk situations are those where there is a possibility of
loss or no loss. There is no gain to the individual or the
organization
› Speculative risks are those where there is possibility of
gain as well as loss
Static and Dynamic Risks
Quantifiable and Non-quantifiable Risks
Chapter 1 Undertaking Risk
Intorduction to Insurance and Risk Management

9. Classifying Pure Risks
Chapter 1 Undertaking Risk
Intorduction to Insurance and Risk Management

10. Personal Risks
These are the risks that directly affect the individual’s
capability to earn income. Personal risks can be
classified into the following types
a) Premature death
b) Old age
c) Sickness or disability
d) unemployment
Chapter 1 Undertaking Risk
Intorduction to Insurance and Risk Management

11. Property Risks
These are the risks to persons in possession of the property
being damaged or lost
Chapter 1 Undertaking Risk
Intorduction to Insurance and Risk Management

12. Liability Risks
These are the risks arising out of the intentional or
unintentional injury to the persons or damages to their
properties through negligence or carelessness
Chapter 1 Undertaking Risk
Intorduction to Insurance and Risk Management

13. Methods of Handling Pure
Risk
Avoidance
Avoid the risk to the circumstances which may lead to
losses
Loss Control
Loss Prevention – Reduce Loss Frequency
Loss Reduction – Lower Loss Severity
Retention
To retain in full or part of the risk
Chapter 1 Undertaking Risk
Intorduction to Insurance and Risk Management

14. Transfer
To transfer the risk to another individual or organization
either by
o Contractual Agreements – insurance, derivatives,
diversification strategies etc.
o Corporatizing – converting the sole proprietor/partnership
business into a company from an organization
Chapter 1 Undertaking Risk
Intorduction to Insurance and Risk Management

15. Summary
Risk is a condition in which there is a possibility of an
adverse deviation from a desired outcome that is expected
or hoped for
Uncertainty refers to a state of mind characterized by
doubt, based on the lack of knowledge about what will or
what will not happen in the future
Perils refer to the immediate causes of loss
Hazards are the conditions that increase the severity of
loss or the conditions affecting perils
Pure risk may be Personal, Property or Liability
Chapter 1 Undertaking Risk
Intorduction to Insurance and Risk Management

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