Introduction to Risk

Management

Risk
Chance or possibility of loss
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 general level, risk is used to describe any situation
where there is uncertainty about what outcome will
occur

Risk
Objective Risk: Relative variation of actual loss from

expected loss
Subjective Risk: Uncertainty based on a persons
mental condition or state of mind

Uncertainty
Uncertainty is perceived as opposite of certainty

where you are assure of outcome or what will happen

Loss and Chance of Loss

Loss means being without something previously

possessed
Chance of loss refers to a fraction or the relative
frequency of loss.
It is the probability of loss

Perils
Refers to the cause of loss or the contingency that

may cause a loss

Refers to the immediate cause of loss
May be general or specific

Hazards
Conditions that increase the severity of loss or the

conditions affecting perils.

Eg. Economic slow down is a peril that may cause a
loss to the business, but it is also a hazard that may
cause a heart attack or mental shock to the
proprietor of the business

hazards
Physical hazards: Property conditions
Intangible hazards: Attitudes and culture

Moral hazards: increase in the possibility or severity of

loss emanating from the intention to deceive or cheat.
Morale hazard: Indifference. Attitude of indifference to
take care of the property on the premise that the loss
will be indemnified by the insurance company.
Societal hazard: Legal and cultural. Increase in the
frequency and severity of loss arising from legal
doctrines or societal customs and structure

Types of Risk
Financial and non-financial risk
Someone is adversely affected by the happening of

an event
The assets or income is likely to be exposed to a
financial loss from the occurrence of the event
Peril can cause the loss

Types of risk.
Group risk
If it affects the economy or its participants on a

macro basis
Risk factors may be socio-economic or political or
natural calamities
Individual risk
Confined to individual identities or small groups

Types of risk.
Pure risks
Risk situations are those where there is a possibility

of loss or no loss.
Generally insurable
Speculative risk
Risk situation in which there is either a possibility of
profit or loss
Generally non-insurable

Types of risk.
Static risk
More or less predictable and are not affected by the

economic conditions.
Involves losses resulting from the destruction of an
asset or changes in its possession as a result of
dishonesty or human failure
Risk doesnt benefit the society
Can be covered by insurance

Types of risk.