INSURANCE AND RISK MANAGEMENT
SOLUTIONS TO STUDY QUESTIONS
CHAPTER 1: Nature of risk and its management
1. Explain the meaning of risk. In your explanation, state the relationship between risk and uncertainty.
Risk is defined as a condition where there is the possibility of an adverse deviation from an expected outcome. That is, there is the possibility of loss. Risk is a state of the real world in which a possibility of loss exists, while uncertainty is a state of mind characterised by doubt or a lack of knowledge about the outcome of an event. Risk can exist (as a state of the real world) even when danger is not perceived and where there is not any uncertainty. Additionally, uncertainty can exist where there isn’t any risk.
2. Risk may be sub-classified in several ways. List the three principal ways in which risk may be sub-classified and explain the distinguishing characteristics of each class.
Risk may be sub-classified as financial or non-financial, dynamic and static, fundamental and particular, and pure and speculative. The distinguishing characteristics of each class are discussed at ¶1-080 to ¶1-120 of the text. The distinction between financial and non-financial risks is very evident: financial risks have financial consequences, while non-financial risks do not. Dynamic risks are those that arise from changes in the economy, such as tightening of money supply while static risks exist even in the absence of economic change. Fundamental risks are those that are impersonal in origin, such as war and the consequences are generally beyond the control of the individual. Particular risks are personal in origin and consequence, such as fire damage to a dwelling and are generally considered to be the individual’s own responsibility. Pure risks are those in which there is a chance of loss or no loss only as opposed to a speculative risk where there is both a chance of a gain or loss.
3. How does objective risk differ from subjective...
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