Chapter 4 insurability of risk

Consolidated materials on Risk management & Risk Financing

1. Chapter-4
Topics Covered
InsurabilityofRisk
RiskManagementDecision-Making
LegalLiabilityforInjury

2. Overview
Requirements of an insurable risk
Large number of similar risk exposure units
Accidental and unintentional loss
No catastrophic loss
Determinable and measurable loss
Calculable chance of loss

3. Definition of 'Insurable Risk'
Definition:Ariskthatconformstothenormsand
specificationsoftheinsurancepolicyinsuchaway
thatthecriterionforinsuranceisfulfillediscalled
insurablerisk.
Description:Therearevariousessentialconditions
thatneedtobefulfilledbeforeacceptanceof
insurabilityofanyrisk.Incaseofascenariowhere
thelossistoohugethatnoinsurerwouldwantto
payforit,theriskissaidtobeuninsurable.
Ariskmaynotbetermedasinsurableifitis
immeasurable,verylarge,certainornotdefinable.

4. Insurance -Insurable Risks
Insurable Risks:Risks are generally divided
into two classes:
Pure risks and Speculative risks.
Pure Risks-these risks involve only the
chance of loss, there is never an opportunity
for gain or profit.
Examples: injury from an accident, loss of
home from an earthquake.
Only Pure Risks are Insurable

5. Insurance -Insurable Risks
Speculative Risks-These risks involve
both the chance of gain or loss.
Examples: Gambling at the race track, or
investing in the real estate market.
Speculative Risk is not Insurable

6. Elements of an Insurable Risk
Lossmustnotbecatastrophic
Lossmustbeunexpectedoraccidental
Lossproducedbytheriskmustbe
definiteand
Measurablemustbeasignificantlylarge
numberofhomogeneousexposureunits
tomakethelossesreasonablepredictable

7. Economic Scale
Riskscanalsobeevaluatedonaneconomicscale
comparingstaticanddynamicrisks:
StaticRisksarethelossesthatarecausedbyfactors
otherthanachangeintheeconomy(forexample-
hurricanes,earthquakes,othernaturaldisasters)
DynamicRisksaretheresultoftheeconomychanging
(examples-inflation,recession,andotherbusiness
cyclechanges).
Dynamic risks are not insurable.

8. Factors Determining Insurable
Risk
Iftheinsurancecompanyhasenoughstatisticstoworkoutthe
probabilityoftherisk,thisiscalledaninsurablerisk.
Actuariesarehighlyqualifiedpeopleworkingforinsurance
companies;theirroleistoworkoutexactlywhatrisksthecompany
willcarry.Thedegreeoftheriskwillinfluencetheinsurance
premium.
Someexamplesofinsurablerisk
Fire insurance
Thebook valueand themarketorreplacement valueof insured property
Money in transit-Aninsurancepolicy in which theinsurance company will
pay ifmoneyis stolen or lost when it is being moved between two places,
for example between a shop and a bank.
Storm, damage and theft
Fidelity insurance -Insurance taken out by an employer against losses
incurred through dishonesty by employees.

9. Factors Determining
Uninsurable Risk
Aninsurancecompanycannotcalculatethe
probabilityoftherisk
Riskistoowidespread-war,catastrophic
Whenthelossisincurredduetoyourown
deliberateactions

10. Insurable Types of Risk
Personalriskisanyriskthatcanaffectthehealthorsafety
ofanindividual,suchasbeinginjuredbyanaccidentor
sufferingfromanillness.
Propertyriskisanyriskthatcancauseapartialortotalloss
toproperty,suchastheft,fire,orso-called"actsofGod".
Liabilityriskisthepersonalorbusinessriskassociatedwith
beingfoundliabletoanotherbecauseofnegligenceorwillful
actsthatcausedalosstoanother'spropertyorperson,suchas
injuringsomeonewhiledrivingundertheinfluenceof
alcohol,orbecausetheinsuredfailedtoperformaduty,such
asperformingcontractualobligations.
How does liability risk convert into legal
risk?

11. Uninsurable Risk
Pricefluctuationsfromthetimetheorderfor
goodsisplacedandthedeliveryofthegoods.
Differentpricelevelsatdifferentplaces
Newinventionsthatreplaceoldtechnology,
eg.IntheITindustry
Nuclearweaponsorwar
Changesinfashionswhengoodsbecome
obsolete.

12. Top Five Uninsurable Risks
Reputational Risks-Reputation of entity
& person. Goodwill.(Overdraft)
Regulatory Risks-Any regulation from
the govt side
Trade Secrets Risks-Inventions
Political Risks
Pandemic Risks ( COVID19)

13. Risk Management Decision-Making
Risk Avoidance
Risk Retention/Tolerance
Risk Transfer
Risk Reduction/Mitigation

14. Risk Management Decision-Making
RiskAvoidance–Thisstrategyinvolvesa
consciousdecisiononthepartoftheorganisation
toavoidcompletelyaparticularriskby
discontinuingtheoperationproducingtheriske.g.
thereplacingahazardouschemicalbyonewith
lessornoriskpotential.
RiskRetention–Theriskisretainedinthe
organisationwhereanyconsequentlossis
financedbythecompany.Therearetwoaspects
toconsiderhere,riskretentionwithknowledge
andriskretentionwithoutknowledge.
TheoryofBlackSwaninriskmanagement-

15. Risk Management Decision-Making
RiskTransfer–Thisreferstothelegal
assignmentofthecostsofcertainpotentiallosses
fromonepartytoanother.Themostcommonway
isbyinsurance.(HoldHarmlessClause)
RiskReduction/Mitigation–Heretherisks
aresystematicallyreducedthroughcontrol
measures,accordingtothehierarchyofrisk
controldescribedinearliersections.

16. Others Risk Management Tools
Risk management information
System(RMIS)
Risk Management Intranet
Risks Mapping
Value at risk(VAR) analysis
Catastrophic Modeling

17. Risk Management Information
System(RMIS)
A riskmanagement information
system(RMIS)isaninformationsystemthat
assistsinconsolidatingpropertyvalues,claims,
policy,andexposureinformationand
providingthetrackingandmanagement
reportingcapabilitiestoenabletheuserto
monitorandcontroltheoverallcostofrisk
management.

18. Risk Management Intranet
Anintranetisaprivatenetworkwithsearch
capabilitiesdesignedforalimited,internal
audience.
Academicorganizationsusesuchmanagement
becausethemaingoalistoprovideandmaintainan
environmentthatwillenhanceandsupportthe
missionandacademicgoalsoftheUniversity.
Exceptionalserviceisanessentialcomponentand
goalofalldepartmentalundertakings.

19. Risks Mapping
Thegoalofariskmapistoimprovean
organization'sunderstandingofitsrisk
profileandappetite.
Clarifythinkingonthenatureandimpactof
risks.
Improvetheorganization'sriskassessment
model.

20. Value at risk(VAR) analysis
Valueatrisk(VaR)isastatisticaltechnique
usedtomeasureandquantifythelevelof
financialriskwithinafirmorinvestment
portfoliooveraspecifictimeframe.
Valueatriskisusedbyriskmanagersin
ordertomeasureandcontrolthelevel
ofriskwhichthefirmundertakes.
Itcandeterminedusinghistoricaldataand
runningacomputersimulation.

21. Catastrophic Modeling
Catastrophemodeling(alsoknownascat
modeling)istheprocessofusing
computer-assistedcalculationsto
estimatethelossesthatcouldbe
sustainedduetoacatastrophicevent
suchasahurricaneorearthquake.

22. Legal Liability for Injury
Thelegalclaimthata
personfailedtoactasa
reasonableandprudent
personshould,thereby
resultingininjurytoanother
person.

23. 4 Required Elements
Duty
Proper Instruction
Access to Medical Care
Proper Progressions
Safe Facilities
Appropriate Supervision
Teach safety procedures

24. 4 Required Elements
Breach
Failure to meet the standard of Care
Cause
The breach must be the cause of the harm.
Harm
In most jurisdictions, the harm must be
physical.

25. Tort Law
Tort:aFrenchwordforwrong;aprivateorcivil
wrongorinjury,otherthanbreachofcontract,
sufferedduetoanotherperson'sconduct.
Tortlaw:apartofthecivillawthatprovides
remediesforactsthatcauseharm;therefore,
injuredpartiesmayfilecivillawsuitsinanattempt
toseekcompensationfortheirinjuries.

26. Tort Law
Tortdamagesaremonetarydamages
thataresoughtfromtheoffending
party.
Theyareintendedtocompensatethe
injuredpartyfortheinjurysuffered.

27. Tort law imposes a duty on
persons and business agents
not to intentionally or negligently
injure others in society.
ns and business agents not to
intentionally or negligently injure
others in society.

28. Categories of Torts
Intentional Torts
Strict Liability Torts
Unintentional Torts
(Negligence)