Risks & its types

Concept of risk, – Basic Concept –Types of Hazard – Characteristics of Insurable Risk – Types of Risks

1. INSURANCE Sri Krishna Arts and Science College Department of Commerce Faculty:Mrs. S. Akhila

2. UNIT-I RISK INSURANCE FOR BPS

3. Agenda Learning Objectives Expected Outcome Key terms Summary Test your knowledge (MCQ) Introduction to next session

4. Learning Objectives Concept of Risk – Basic Concept –Types of Hazard – Characteristics of Insurable Risk – Types of Risks

5. Expected Outcome The outcome of this session is to understand the Concept of Risk, Types of Hazard, Characteristics of Insurable Risk

6. RISK

7. RISK Risk is the doubt regarding the outcome of a situation Risk is the possibility of damage or loss. Risk is anything that is considered to be a potential Hazard “Risk is an uncertain event that may have a positive or negative impact”

8. Terms related to Risk in Insurance Level of Risk Uncertainty Peril & Hazard

9. Uncertainty

10. Uncertainty Insurance is available only for uncertain outcomes. E.g. Although the death is certain, when we will die (date & time of death ) is uncertain, so death is an insurable event. Once the timing of death becomes certain, i.e when an individual is suffering from a fatal disease or an individual is a very aged person, then an insurance company will not cover those risks.

11. Uncertainty “If there is possibility of loss, but not a certain loss, only that event can be insured”

12. Level of Risk

13. Level of Risk Some things have a greater impact of happening than others and this determines the level of risk. The level of risk is normally assessed in terms of: Probability (or Frequency) of an event happening. Severity (or extent) of the event if it happens.

14. Probability : Calculating the probability of an event, on the basis of the past data collected, say a person will die within one year , this allows insurance companies to determine the probability of a particular event, such as death. Depending on the age, health, lifestyle, occupation etc,the risk on one individual will vary from the other.

15. Severity : The amount of claims the insurance companies would experience if the insured events were to actually occur on the basis of the severity of the losses. i.e the level of risk increases based on the level of impact of any event occurred.

16. Peril &Hazard

17. Peril Peril refers to the specific event or reason which might cause a loss . When a building burns, fire is the peril. When an individual is injured in an accident, the accident is the peril. Natural disasters such as earthquakes, storms ,floods etc.are examples of perils which may lead to loss of life and damage to assets

18. Hazard Hazard is a condition that either increases the chance that a peril will happen or may intensify its effect if it occurs. Hazard is the underlying factor which enhances the effect of the peril that leads to the probability of a particular loss. e.g. Wooden building which can catch fire easily leading to a loss

19. Types of Hazards Hazard can be categorized into two types: Physical Hazards Moral Hazard s

20. Physical Hazards: It arises from an individual’s occupation,health,lifestyle etc. e.g. a) People working inside a coal mine b)A person with family history of heart disease, high blood pressure etc. is a physical hazard. Moral Hazards: It is the attitude and ethical conduct of the insured. It cannot be managed but can be avoided by declining to insure the risk. e.g. Insured giving false information to insurer in order to get an insurance policy.

21. Characteristics of Insurable Risk In order for a risk to insurable, its potential loss must have the following characteristics: The loss must occur by chance; The loss must be definite; The loss must be significant; The rate of loss must be predictable; The loss must not be catastrophic to the insurer .

22. The loss must occur by chance: The loss should occur either unexpectedly or caused unintentionally by the person covered by the insurance . e.g. a) A person who dies due to accident, which is completely an unexpected happening. The loss must be definite: An insurable loss must be definite in terms of time and amount as well as the policy terms and policy benefits. e.g. An insurer must be able to know when to pay a claim and how restricted is the period of cover granted to the insured .

23. The loss must be significant: The loss of common things like Umbrella, key pouches, pen, pencils and sunglass are not very significant financially. These types of losses are not normally insured, as the administrative cost of handling such small claims could be so high as to lead to increased cost for such insurance protection

24. The loss must be Predictable: To provide compensation in the event of a specified loss, an insurer must be able to assess the chance of loss occurring or predict the probable rate of loss. These predictions of future losses would enable the insurer to determine the proper rate of premium to charge each policy- holder to ensure that insurers have adequate funds to pay claims as they become due.

25. The loss must not be catastrophic to the insurer: Where the large numbers of people are subject to heavy risks or where there is a concentration of risks, the resultant potentials losses could cause or contribute to catastrophic financial damage to the insurer. Such risks are not insurable as the principle that the losses of a few are borne by the contributions of many cannot be applied here. Moreover, the losses could be too excessive and the insurer’s accumulated insurance funds may not be sufficient to support them. E.g. P roperty damage caused by war. In such cases, governments often accept responsibility for these risks.  

26. Types of Risk Financial Risk Pure Risk Speculative Risk Particular Risk Fundamental Risk

27. Financial Risk Risks that can be measured in monetary terms. E.g. Early loss of the breadwinner of the family. Pure Risk Risks where there is no possibility of making any sort of profit, there can be either loss or possible outcome of breaking. Pure risk is an insurable risk. E.g. Death Speculative Risk Risks where there is a possibility of making profit or incurring loss or the possible outcome of breaking. This is not an insurable risk. E.g. Risk associated with stock market .

28. Particular Risk These risks are personal or local in their effects. The consequences of these risks affect specific individuals or localities. This is an insurable risk. E.g. Fire breaking in a factory which might impact the nearby buildings but might not impact the whole community. Fundamental Risk Risks which are so vast in scale that is not insurable due to its catastrophic potential. This is not an insurable risk. E.g Earth quake in an earthquake prone region . Only Financial, Pure & Particular risks are insurable risks.

29. Key Terms Risk Peril Hazard Uncertainty Insurable Risk Catastrophic Financial Risk Pure Risk Speculative Risk Fundamental Risk

30. Summary Risk is the possibility of damage or loss. Risk is an uncertain event that may have a positive or negative impact. Insurance is available only for uncertain outcomes. The level of risk is normally assessed in terms of Probability and Severity . Peril refers to the specific event or reason which might cause a loss .

31. Summary Hazard is a condition that either increases the chance that a peril will happen or may intensify its effect if it occurs. Hazard can be categorized into two types: Physical Hazards & Moral Hazard s Physical hazards arises from an individual’s occupation, health, lifestyle etc. Moral Hazards arises from state of mind , attitude or intensions of the insured, which enhance the probability of a peril.

32. MCQ ???????

33. MCQ ??????? 1.Insurance cannot prevent the occurrence of risk but it provides for the……… a) losses of risk b) occurrence of risk c) chance of risk d)Compensation of risk a) losses of risk

34. 2. Which is/are ways to deal with risk? a) Mitigate b) Contingency c) Transfer d) Ignore (e) All of the above MCQ ???????

35. 3. What is risk? a) Negative consequence that could occur b) Negative consequence that will occur c) Negative consequence that must occur d) Negative consequence that shall occur (a) Negative consequence that could occur MCQ ???????

36. MCQ ??????? 4. _____ A fee that is charged for insurance coverage (c) Premium Insurance Insurance Policy Premium d) Consideration

37. 5. Risks that insurance firms will not assume are called a. uninsurable risks b. insurable risks. c. General Risk d. pure risks (a) uninsurable risks MCQ ???????

38. Next Hour- Risk Management

39. Risk Management Risk Prevention or Avoidance Risk Control Risk Retention Risk Transfer Risk management is the identification, evaluation, and prioritization of risks. Risk can be managed in the following ways:

40. Thank You SKASC-Department of Commerce BPS & CM