Insurance and Risk Management

Topics: Insurance, Risk management, Risk Pages: 39 (12579 words) Published: March 31, 2013

1.1Concept of Risk

The word risk is certainly used frequently in everyday conversation and seems to be well understood. Risk implies some form of uncertainty about an outcome in a given situation. An event might occur and if it does, the outcome is not favourable to us. Risk can be contrasted with the word chance which implies some doubt about the outcome in a given situation; the difference is that the outcome may also be favourable e.g. risk of an accident, chance of winning a bet etc

However in common business conversations the word risk is used to mean different things: i)Risk as cause e.g. fire as a risk, Personal injury as a risk etc. ii)Risk as likelihood e.g. the risk of something happening, leaving keys in a car results in high risk etc. iii)Risk as the object – e.g. factory, plane, machine or ship might be referred to as the risk. vi)Risk as verb – It is not only used as a noun but also as a verb e.g. risk of crossing the road.

All the above illustrate how the use of the word goes far beyond its technical meaning.

1.2Meaning of risk

Various scholars have advanced different definitions of risk as follows:-

i)Risk is the possibility of an unfortunate occurrence.
ii)Risk is a combination of hazards.
iii)Risk is unpredictability – the tendency that actual results may differ from predicted results. iv)Risk is uncertainty of loss.
v)Risk is the possibility of loss.

Rather than try to ascertain the best definition of risk, the underlying commonality in all the definitions should be of interest. From the above definitions some common thread runs through each of them namely:

i)Uncertainty – If suffices because we have imperfect knowledge which leads to doubt and hence the uncertainty which we express e.g. a child playing in the middle of a busy road. Uncertainty implies doubt about the future based on a lack of knowledge or imperfection in knowledge. If we always knew what was going to happen, there would be no risk. Risk exists outside the individual, it might be recognized as existing but this is not a pre-requisite. Risk is thus objective and not dependent on any one individual. ii)Levels of Risk – there are different levels of risk, some will be more or less risky than others. This can be illustrated by looking at a house constructed by the river side (river Nzoia in Budalangi, Busia), the river being known for its potential to overflow its banks. The word risky may describe this situation. There is uncertainty as to whether the river will flood or not. The fact that the river is known for flooding has heightened the prospect that damage will occur, that is, the frequency of damage is high. The term risky may be used to denote this heightened possibility. If another house is constructed further from the river bank and on a slight hill, it is in a less risky situation, not because the prospect of the river flooding has changed but because the possibility of damage being caused to the house is much lower. However, judgment may change if the value at risk is considered. If the first house is valued at Ksh 50,000 and the second at Ksh 5,000,000, the higher risk in view of higher potential of severity of loss may be the second house. Risk is thus a combination of the likelihood of an event and the severity of damage should the event occur. If an event occurs a great deal, then our knowledge about the future begins to increase and an element of certainty begins to creep in e.g. shoplifting, combining frequency and severity we find two relationships

a) High frequency and low severity e.g. industrial injuries. b) Low frequency and high severity e.g. 1998 Nairobi bomb blast.

iii)Peril and Hazard (Cause(s))
We often use risk to mean both the event which will give rise to some loss and the factors which may influence the outcome of a loss. In our house example, flood is the cause of the loss...
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