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Lecture Risk management and insurance - Lecture No 2: Risk in Our Society (Continued)

In this chapter, the learning objectives are: Different definitions of risk, chance of loss, peril and hazard, classification of risk, major personal risks and commercial risks, burden of risk on society, techniques for managing risk. | Risk in Our Society (Continued) Lecture No. 2 1 Objectives Different Definitions of Risk Chance of Loss Peril and Hazard Classification of Risk Major Personal Risks and Commercial Risks Burden of Risk on Society Techniques for Managing Risk 2 Different Definitions of Risk Risk: Uncertainty concerning the occurrence of a loss Loss Exposure: Any situation or circumstance in which a loss is possible, regardless of whether a loss occurs. Objective Risk vs. Subjective Risk Objective risk is defined as the relative variation of actual loss from expected loss It can be statistically calculated using a measure of dispersion, such as the standard deviation Subjective risk is defined as uncertainty based on a person’s mental condition or state of mind Two persons in the same situation may have different perceptions of risk High subjective risk often results in conservative behavior 3 Transparency Master 1.2 Chance of Loss Chance of loss: The probability that an event will occur Objective . | Risk in Our Society (Continued) Lecture No. 2 1 Objectives Different Definitions of Risk Chance of Loss Peril and Hazard Classification of Risk Major Personal Risks and Commercial Risks Burden of Risk on Society Techniques for Managing Risk 2 Different Definitions of Risk Risk: Uncertainty concerning the occurrence of a loss Loss Exposure: Any situation or circumstance in which a loss is possible, regardless of whether a loss occurs. Objective Risk vs. Subjective Risk Objective risk is defined as the relative variation of actual loss from expected loss It can be statistically calculated using a measure of dispersion, such as the standard deviation Subjective risk is defined as uncertainty based on a person’s mental condition or state of mind Two persons in the same situation may have different perceptions of risk High subjective risk often results in conservative behavior 3 Transparency Master 1.2 Chance of Loss Chance of loss: The probability that an event will occur Objective Probability vs. Subjective Probability Objective probability refers to the long-run relative frequency of an event assuming an infinite number of observations and no change in the underlying conditions It can be determined by deductive or inductive reasoning Subjective probability is the individual’s personal estimate of the chance of loss A person’s perception of the chance of loss may differ from the objective probability 4 Transparency Master 1.2 Peril and Hazard A peril is defined as the cause of the loss In an auto accident, the collision is the peril A hazard is a condition that increases the chance of loss Physical hazards are physical conditions that increase the chance of loss (icy roads, defective wiring) Moral hazard is dishonesty or character defects in an individual, that increase the chance of loss (faking accidents, inflating claim amounts) Attitudinal Hazard (Morale Hazard) is carelessness or indifference to a loss, which increases the frequency or severity of a loss (leaving