Learning Objectives 3 / 4 Learn about the three maior types oI 'risk attitudes' Learn how enterprise-wide risk approaches combine risk categories. Learn about causes of lossesperils and the hazards, which are the items increasing the chance of loss.
Learning Objectives 3 / 4 Learn about the three maior types oI 'risk attitudes' Learn how enterprise-wide risk approaches combine risk categories. Learn about causes of lossesperils and the hazards, which are the items increasing the chance of loss.
Learning Objectives 3 / 4 Learn about the three maior types oI 'risk attitudes' Learn how enterprise-wide risk approaches combine risk categories. Learn about causes of lossesperils and the hazards, which are the items increasing the chance of loss.
Chapter 1 The Nature of Risk: Losses and Opportunities 1 - 2 2010 Flat World Knowledge, Inc. 1 - 2 2010 Flat World Knowledge, Inc. Learning Objectives Build the definition of risk as a consequence of uncertainty and within a continuum of decision- making roles. Learn about the three maior types oI 'risk attitudes. Learn what a risk professional means by exposure. Learn several different ways to split risk exposures according to the risk types involved. 1 - 3 2010 Flat World Knowledge, Inc. 1 - 3 2010 Flat World Knowledge, Inc. Learning Objectives Learn how enterprise-wide risk approaches combine risk categories. Learn the terminology used by risk professionals to note different risk concepts. Learn about causes of lossesperils and the hazards, which are the items increasing the chance of loss. 1 - 4 2010 Flat World Knowledge, Inc. 1 - 4 2010 Flat World Knowledge, Inc. The Notion and Definition of Risk The notion of risk is inextricably linked to the notion of uncertainty. Uncertainty is having two potential outcomes for an event or situation. Uncertainty about which of several possible outcomes will occur circumscribes the meaning of risk. 1 - 5 2010 Flat World Knowledge, Inc. 1 - 5 2010 Flat World Knowledge, Inc. The Notion and Definition of Risk Risk is the uncertainty about a future outcome, particularly the consequences of a negative outcome. Our perception of risk arises from our perception of and quantification of uncertainty. 1 - 6 2010 Flat World Knowledge, Inc. 1 - 6 2010 Flat World Knowledge, Inc. Table 1.1 - Examples of Consequences That Represent Risks 1 - 7 2010 Flat World Knowledge, Inc. 1 - 7 2010 Flat World Knowledge, Inc. The Role of Risk in Decision Making Risk encompasses the potential provision of both an opportunity for gains as well as the negative prospect for losses. Risk permeates the spectrum of decision making from goals of value maximization to goals of insolvency minimization. 1 - 8 2010 Flat World Knowledge, Inc. 1 - 8 2010 Flat World Knowledge, Inc. Attitudes Toward Risks Risk averse refers to shying away from risks and preferring to have as much security and certainty as is reasonably affordable. Risk seeker is someone who will enter into an endeavor as long as a positive long run return on the money is possible, however unlikely. Risk neutral attitude is seen when one`s risk preference lies between the extremes of risk averse and risk seeking. 1 - 9 2010 Flat World Knowledge, Inc. 1 - 9 2010 Flat World Knowledge, Inc. Types of RisksRisk Exposures Pure versus speculative risk exposures Pure risk: Risk that features some chance of loss and no chance of gain. Speculative risk: Risk that features a chance to either gain or lose. Some risks can be transferred to a third party, while some require risk transfers that use capital markets, known as hedging or securitizations. 1 - 10 2010 Flat World Knowledge, Inc. 1 - 10 2010 Flat World Knowledge, Inc. Personal loss exposures (personal pure risk) Property loss exposures (property pure risk) Liability loss exposures (liability pure risk) Liability loss is loss caused by a third party who is considered at fault. Types of RisksRisk Exposures 1 - 11 2010 Flat World Knowledge, Inc. 1 - 11 2010 Flat World Knowledge, Inc. Catastrophic loss exposure and fundamental or systemic pure risk Fundamental risk or systemic risk are risks that are pervasive to and affect the whole economy, as opposed to accidental risk for an individual. Types of RisksRisk Exposures 1 - 12 2010 Flat World Knowledge, Inc. 1 - 12 2010 Flat World Knowledge, Inc. Table 1.3 - Examples of Risk Exposures by the Diversifiable and Nondiversifiable Categories 1 - 13 2010 Flat World Knowledge, Inc. 1 - 13 2010 Flat World Knowledge, Inc. Enterprise Risks The opportunities in the risks and the fear of losses encompass the holistic risk or the enterprise risk of an entity. Enterprise risk management (ERM) is one of today`s key risk management approaches. 1 - 14 2010 Flat World Knowledge, Inc. 1 - 14 2010 Flat World Knowledge, Inc. Perils and Hazards Perils: The causes of loss. Natural perils: Causes of losses over which people have little control. Human perils: Causes of losses that lie within individuals` control. Economic perils: Causes of losses resulting from the state of the economy. 1 - 15 2010 Flat World Knowledge, Inc. 1 - 15 2010 Flat World Knowledge, Inc. Table 1.4 - Types of Perils by Ability to Insure 1 - 16 2010 Flat World Knowledge, Inc. 1 - 16 2010 Flat World Knowledge, Inc. Hazards: Conditions that increase the cause of loss; they may increase the probability of losses, their frequency, their severity, or both. Physical hazards: Tangible environmental conditions that affect the frequency and/or severity of loss. I ntangible hazards: Attitudes and nonphysical cultural conditions can affect loss probabilities and severities of loss. Hazards are critical as our ability to reduce their effects will reduce both overall costs and variability. Perils and Hazards 1 - 17 2010 Flat World Knowledge, Inc. 1 - 17 2010 Flat World Knowledge, Inc. Summary Risk is a consequence of uncertainty, and can be emotional, financial, or reputational. The three risk attitudes include being risk averse, risk neutral, and a risk seeker. The main categories of risks include pure versus speculative, diversifiable versus nondiversifiable, and idiosyncratic versus systemic risk. Perils are the causes of loss while hazards are conditions that increase the cause of loss.