Tuesday, February 10, 2009

What is Risk..?

1. What is Risk..?

ü Uncertainty concept = risk traditionally has been defined uncertainty

ü Objective Risk

Ø Defined as the relative variation of actual loss from expected loss

Ø Declines as the number of exposure unites increases

Ø Is measurable by using the standard deviation or coefficient of variation

ü Subjective Risk

Ø Defined as uncertainty based on one’s mental condition or state of mind

Ø Difficult to measure

2. Chance of loss

ü Objective Probability

Ø A priori – by logical deduction such as in games of chance

Ø Empirically – by induction, through analysis of data

ü Subjective Probability

Ø A personal estimate of the chance of loss. It need not coincide with objective probability and is influenced by a variety of factors including age, sex, intelligence, education and personality.

ü Change of loss distinguished from risk

Ø Although chance of loss may be the same for two groups, the relative variation of actual loss from expected loss may be quite different.

3. Methods of handling risk

ü Avoidance

ü Loss control

ü Retention

ü Noninsurance transfer

ü Insurance

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