Understanding Risk

Introduction to Risk Management

Understanding Risk

Risk

• State of Uncertainty

• Possibility can result in loss or other undesirable outcome

• Uncertainty is the likelihood that something will or will not happen

• More than one possibilty

• 50/50 chance

Pure Risk - chance of loss with no chance for gain

• Random (can happen to anyone)

• Accidents - physical injury or property damage

• Illnesses that people get throughout life, part of aging, Corona Virus

• Acts of Nature (damage to people and property)

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You can protect yourself from pure risk, even though it is random

• Have a plan in place

• Plans to protect your life and your lifestyle

• Plans to protect again catastrophic events

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Multiple Select

Is anyone exempted from pure risk

• Yes

• No

Multiple Select

Is anyone exempted from pure risk?

• Yes

• No

Economic risk can result in gain or loss because of economic conditions

• Recovery or growth usually realizes financial gains

• Recovery (growth) - economy is growing, jobs are being created, people are optimistic, businesses are selling and hiring and orders are being placed for goods and services

Economic risk can result in gain or loss because of economic conditions

• Peak - period of time when the economy hits the top

• Things are going fast

• People cannot pay more for products or buy more because they have reached their limit

Economic risk can result in gain or loss because of economic conditions

• Decline - period when the economy is slowing (another name is Recession)

• Jobs are being lost

• People are pessimistic; businesses are cutting back on inventory; sales are down; factories are laying off workers; orders are smaller and least frequent

Economic risk can result in gain or loss because of economic conditions

• Trough (right in the middle) Economy has hit the bottom

• Things are as slow

• People are unemployed and unable to pay bills and meet obligations; business is sluggish and they are not hiring; many businesses may fail; consumers need help paying bills

Multiple Choice

What are the stages in economic contraction?

• Peak, decline

• Peak, Recovery, Trough

• Peak, Growth, Recovery

• Peak, Decline, Trough

Multiple Choice

Describe economic expansion

• Trough, Decline, Peak

• Decline, Growth, Peak

• Trough, Growth/Recovery, Peak

Multiple Choice

Who faces economic risk?

• Only the rich

• Only the poor

• Only businesses and corporations

• Everyone

INSURANCE

• Method for spreading individual risk among a large group of people by making losses more affordable for all

INSURABLE RISK

• A Pure RISK - that is faced by many and for which the amount of loss can be predicted

• Use past events to make predictions (i.e. flooding, hurricanes, car accidents, etc

INSURABLE INTEREST

• Any financial interest in life or property

• If the life or property is lost or damaged, the insured would suffer greatly

• You CANNOT buy insurance on someone else's house but you can for your house

• What a person has to lose if a disaster occurs

Personal Risk

• Chance of a loss involving your income and standard of living

• Protection provided by life, health and disability insurance

• Also protects those depending on you to provide for them

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Property Risk

• Chance of loss or harm to personal or real property

• Home, car, or possessions

• Could be damaged or destroyed by fire, theft, wind, rain, accident or other hazards

• Purchase property insurance

Liability Risk

• Chance of loss that may occur when errors or actions result in injuries to others or damages to their property

• You accidently damage or injury someone or their property by your conduct or action

• Protects you when others sue your for injuring them or damaging their property

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Spreading the Risk

• Insurance company is the insurer

• We are the insured

• We pay a premium - a fee paid at intervals and we received a policy

• Indemnification - putting the policyholder back in the same financial condition as he was in before the loss

Speculative Risk - results in EITHER gain or loss

• Investing - you could gain or loss money

• Not accidental or random

• Hedging is making an investment to help offset loss

• Hedging helps to reduces losses from risky acts but does not reduce risk itself