Principle of Risk Management and Insurance

Topics: Insurance, Life insurance, Term life insurance Pages: 23 (4082 words) Published: September 14, 2013

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PRINCIPLE OF RISK MANAGEMENT AND INSURANCE

NURUL SYAFIQAH SHAHRIM
2012216192

CHAPTER 1 : RISK AND ITS TREATMENT
DIFFERENT DEFINITIONS
1) RISK - uncertain in future
- eg : risk of being killed in an auto accident, risk of lung cancer for smokers 2) LOSS EXPOSURE - situation in which loss is possible to occur - eg : building may be damaged by earthquake 3) OBJECTIVE RISK - relative variation of actual loss from expected loss - apply LAW OF LARGE NUMBER (as number of exposure units increase, more closely the actual loss will approach the expected loss experience 4) SUBJECTIVE RISK - uncertainty based on a person’s mental condition - eg: a drunker who drive a car may be uncertain whether he will arrive home safely or will be arrested by the police 5) CHANCE OF LOSS - probability that event will occur

CHANCE OF
LOSS

OBJECTIVE PROBABILITY SUBJECTIVE PROBABILITY

- individual’s personal estimate of the chance of loss
- people buy lottery ticket on their birthday believe it is their lucky day and overestimate the small chance of winning INDUCTIVE REASONING
Eg : person age 21 will die before age 26 cannot be logically deduced DEDUCTIVE REASONING
Eg : toss a coin, roll a dice

6) PERIL - cause of loss
- eg : if your house burns because of fire, then the peril is the fire
7) HAZARD - condition that creates or increases frequency or severity of loss
- 4 types : (i) physical - physical condition that frequency/severity of loss
- eg : icy roads may lead to accidents
: (ii) moral - dishonesty/character defects in individual that frequency/
severity of loss
- eg : faking an accident
: (iii) morale - carelessness/indifference to loss which frequency/
severity of loss
- eg : leaving car keys in an unlocked car chance of loss
: (iv) legal - characteristics of legal systems that frequency/severity of
loss
- adverse jury verdicts in liability lawsuits

CLASSIFICATION OF RISK

MAJOR PERSONAL RISKS & COMMERCIAL RISKS

PERSONAL RISKS RISKS

- risk that directly affect an individual
- 4 types : risk of premature death => death of head family with unfulfilled financial obligations
=> effects : human life value of head family is lost forever
: additional expenses incurred
: trouble making ends meet
: non-economic costs incurred
: risk of insufficient retirement income
: risk of poor health
: risk of unemployment

PROPERTY RISKS RRISKS

- risk of having property damaged or lost from numerous causes - 2 types of loss : direct loss => financial loss that result from physical damage,...
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