Risk management project
Chapter-4
Topics Covered
- Insurability of Risk
- Risk Management Decision-Making
- Legal Liability for Injury
Overview
Requirements of an insurable risk
Large number of similar exposure units
Accidental and unintentional loss
No catastrophic loss
Determinable and measurable loss
Calculable chance of loss
Definition of 'Insurable Risk'
- Definition: A risk that conforms to the norms and specifications of the insurance policy in such a way that the criterion for insurance is fulfilled is called insurable risk.
- Description: There are various essential conditions that need to be fulfilled before acceptance of insurability of any risk. In case of a scenario where the loss is too huge that no insurer would want to pay for it, the risk is said to be uninsurable.
- A risk may not be termed as insurable if it is immeasurable, very large, certain or not definable.
Insurance - Insurable Risks
Insurable Risks: Risks are generally divided into two classes:
Pure risks and Speculative risks.
Pure Risks- these risks involve only the chance of loss, there is never an opportunity for gain or profit.
Examples: injury from an accident, loss of home from an earthquake.
Only Pure Risks are Insurable
Insurance - Insurable Risks
Speculative Risks- These risks involve both the chance of gain or loss.
Examples: Gambling at the race track, or investing in the real estate market.
Speculative Risk is not Insurable
Elements of an Insurable Risk
Loss must not be catastrophic
Loss must be unexpected or accidental
Loss produced by the risk must be definite and
Measurable must be a significantly large number of homogeneous exposure units to make the losses reasonable predictable
Economic Scale
Risks can also be evaluated on an economic scale comparing static and dynamic risks:
Static Risks are the losses that are caused by factors other than a change in the economy (for example- hurricanes, earthquakes, other natural disasters)
Dynamic Risks are the result of the economy changing (examples- inflation, recession, and other business cycle changes).
Dynamic risks are not insurable.
Factors Determining Insurable Risk
If the insurance company has enough statistics to work out the probability of the risk, this is called an insurable risk.
Actuaries are highly qualified people working for insurance companies; their role is to work out exactly what risks the company will carry. The degree of the risk will influence the insurance premium.
Some examples of insurable risk
Fire insurance
The book value and the market or replacement value of insured property
Money in transit-An insurance policy in which the insurance company will pay if money is stolen or lost when it is being moved between two places, for example between a shop and a bank.
Storm, damage and theft
Fidelity insurance -Insurance taken out by an employer against losses incurred through dishonesty by employees.
Factors Determining Uninsurable Risk
An insurance company cannot calculate the probability of the risk
Risk is too widespread- war, catastrophic
When the loss is incurred due to your own deliberate actions
Insurable Types of Risk
- Personal risk is any risk that can affect the health or safety of an individual, such as being injured by an accident or suffering from an illness.
- Property risk is any risk that can cause a partial or total loss to property, such as theft, fire, or so-called "acts of God".
- Liability risk is the personal or business risk associated with being found liable to another because of negligence or willful acts that caused a loss to another's property or person, such as injuring someone while driving under the influence of alcohol, or because the insured failed to perform a duty, such as performing contractual obligations.
Uninsurable Risk
Price fluctuations from the time the order for goods is placed and the delivery of the goods.
Different price levels at different places
New inventions that replace old technology, eg. In the IT industry
Nuclear weapons or war
Changes in fashions when goods become obsolete.
Top Five Uninsurable Risks
Reputational Risks
Regulatory Risks
Trade Secrets Risks
Political Risks
Pandemic Risks
Risk Management Decision-Making
Risk Avoidance
Risk Retention
Risk Transfer
Risk Reduction
Risk Management Decision-Making
Risk Avoidance – This strategy involves a conscious decision on the part of the organisation to avoid completely a particular risk by discontinuing the operation producing the risk e.g. the replacing a hazardous chemical by one with less or no risk potential.
Risk Retention – The risk is retained in the organisation where any consequent loss is financed by the company. There are two aspects to consider here, risk retention with knowledge and risk retention without knowledge.
Risk Management Decision-Making
Risk Transfer – This refers to the legal assignment of the costs of certain potential losses from one party to another. The most common way is by insurance.
Risk Reduction – Here the risks are systematically reduced through control measures, according to the hierarchy of risk control described in earlier sections.
Others Risk Management Tools
Risk management information System(RMIS)
Risk Management Intranet
Risks Mapping
Value at risk(VAR) analysis
Catastrophic Modeling
Risk Management Information System (RMIS)
A risk management information system (RMIS) is an information system that assists in consolidating property values, claims, policy, and exposure information and providing the tracking and management reporting capabilities to enable the user to monitor and control the overall cost of risk management.
Risk Management Intranet
An intranet is a private network with search capabilities designed for a limited, internal audience.
Academic organizations use such management because the main goal is to provide and maintain an environment that will enhance and support the mission and academic goals of the University.
Exceptional service is an essential component and goal of all departmental undertakings.
Risks Mapping
The goal of a risk map is to improve an organization's understanding of its risk profile and appetite.
Clarify thinking on the nature and impact of risks.
Improve the organization's risk assessment model.
Value at risk(VAR) analysis
- Value at risk (VaR) is a statistical technique used to measure and quantify the level of financial risk within a firm or investment portfolio over a specific time frame.
- Value at risk is used by risk managers in order to measure and control the level of risk which the firm undertakes.
- It can determined using historical data and running a computer simulation.
Catastrophic Modeling
Catastrophe modeling (also known as cat modeling) is the process of using computer-assisted calculations to estimate the losses that could be sustained due to a catastrophic event such as a hurricane or earthquake.
Legal Liability for Injury
The legal claim that a person failed to act as a reasonable and prudent person should, thereby resulting in injury to another person.
4 Required Elements
Duty
Proper Instruction
Access to Medical Care
Proper Progressions
Safe Facilities
Appropriate Supervision
Teach safety procedures
4 Required Elements
Breach
Failure to meet the standard of Care
Cause
The breach must be the cause of the harm.
Harm
In most jurisdictions, the harm must be physical.
Tort Law
Tort: a French word for wrong; a private or civil wrong or injury, other than breach of contract, suffered due to another person's conduct.
Tort law: a part of the civil law that provides remedies for acts that cause harm; therefore, injured parties may file civil lawsuits in an attempt to seek compensation for their injuries.
Tort Law
Tort damages are monetary damages that are sought from the offending party.
They are intended to compensate the injured party for the injury suffered.
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Tort law imposes a duty on persons and business agents not to intentionally or negligently injure others in society.
ns and business agents not to intentionally or negligently injure others in society.
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Categories of Torts
Intentional Torts
Strict Liability Torts
Unintentional Torts (Negligence)
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