Notes Topic Chapter 1 Topic 1 Intro and Overview Risk Risk Management Uncertainty Risks at Temple University o What Risks Personal Injury Theft Tangible property financial employee diversion of funds intellectual patents ideas security breach cyber security Finance tuition state of Pennsylvania Reputation Natural Disaster Fire Depreciation of real property Separate Assets Lawsuits Sexual Harassment Discrimination Negligence slip and falls Malpractice hospital Professional Liability Negligence Workers Compensation Auto fender bender Types of Risk o Traditional Risk Management Model Uncertainty of outcome Produces loss to you or the company Loss is always financial impact Loss with certainty Risk Loss o Budget Plan Avoid Possibility of Negative Outcome No indication of likelihood Probability of Loss Defining and Quantifying Likelihood of outcome or event Risk Classification Pure Risk VS Speculative Risk Pure Risk o Chance of Loss or no loss NO Gain Example My house it either burns or it didn t Owner of commercial building faces risk associated with fire loss o No Change in Financial Condition Speculative Risk o A chance of loss no loss or chance of gain Example Apartment building Rent out to tenants might profit but also might incur loss Static Risk o Does not change significantly over time Always Present for an organization Static Risk VS Dynamic Risk Examples Natural Disasters death fire theft Dynamic Risk o Varies due to changing circumstances Dependents are covered until age 26 New Law connected to benefits Obamacare New Technology Economic Crisis of 2008 Fuel prices Foreign Exchange Rates Biggest Dynamic Risk Terrorism Examples Recessions Regulatory changes Increased competition Changes in consumer habits Subjective Risk o Perceived amount of risk based on an assessment of risk based on company s opinion of Subjective VS Objective Risk the risk Objective Risk o Based on Facts Usually quantifiable o Measurable Variation in uncertain outcomes based on facts and data Subjective Risk Objective Risk Differ Based On Familiarity Control Consequence over Likelihood Risk Awareness o If you or the company is not aware of the risk impact on company you will perceive the likelihood as low Diversifiable Risk VS Non Diversifiable Risk Diversifiable Risk o Risk that affects some individuals or companies o Random Example Non Diversifiable Risk Fire in a strip mall that affects one or a small number of businesses o Risk that affects society at large Large segment of society affected at the same time o Occur Simultaneously Not Random Examples Inflation Unemployment Natural disasters such as hurricanes Liability Exposure o Loss due to acts of negligence Torts Settlements Judgments Cost Legal Fees Cost Reputation Cost Factors Affecting Risk Peril o Immediate cause of loss o Random Event that causes loss to occur Natural Disasters Frequency of Loss How often do losses occur Units of measurement Of Injuries Days out of work Days on light duty Days overtime for coverage Temporary Employees Example o Low Frequency Low Severity o High Frequency High Severity Flood caused the loss to the beach house only 1 peril Severity Severity o Given that a loss has occurred How much The Size of a loss o Hazard Severity is always measured in Condition that increases the frequency or severity of a loss Underlying condition behind the loss 4 Classifications for Hazards Can increase frequency severity or both Moral Condition that increases the likelihood that a person will intentionally Morale Condition of carelessness or indifference that increases the cause or exaggerate a loss frequency or severity of loss Physical Condition of property persons or operations that increases the frequency and or severity of loss Legal Condition of the legal environment that increases the frequency and or severity of loss Example Peril Fire Cause of loss Hazard The distance to the fire hydrant combustible materials lack of sprinklers in establishment Difference Between Hazard and Peril Hazard o A condition that increases the frequency or severity of a loss Example Location of my beach house that got flooded o There are numerous hazards Peril o Random event or immediate cause of loss Example Flood cause the loss to my beach house o Only 1 peril Moral Hazard Condition that increases likelihood that a person will intentionally cause or exaggerate a Moral Hazard VS Morale Hazard loss o Act differently because of the existence of insurance o Not Necessarily bad Example o When is it bad to act differently Fraud Epitome of Moral Hazard Health Insurance going to the Doctor more frequently Healthier lifestyle Insurance Fraud life insurance Negative outcome spread risks share costs Home Insurance Fraud Negative outcome spread risks share costs Auto Insurance Fraud Negative outcome spread risks share costs Change your behavior because you have insurance Price is fixed Change demand higher premiums Public Policy Issue Ultimately everyone pays more o Attitude difference o Because you now have insurance you act carelessly Examples Morale Hazard Condition of carelessness or indifference that increases frequency or severity of loss Driving carelessly failing to lock an unattended building failing to clear an icy sidewalk to protect pedestrians Difference Between Moral Hazard and Morale Hazard o Condition that increases the likelihood that a person will intentionally cause or exaggerate Moral Hazard a loss Morale Hazard o Condition of carelessness or indifference that increases the frequency or severity of loss A Moral Hazard results from a deliberate act A Morale Hazard results from carelessness or indifference Summary of Topic 1 Loss Risk Exposure o Loss Costs Money Pure Risk Vs Speculative Risk o Pure Risk No Gain o Speculative Risk Possibility of Gain Static Risk Vs Dynamic Risk o Static Risk Remains the same constant o Dynamic Risk Change due to circumstance Subjective Risk Vs Objective Risk o Subjective Risk Opinion o Objective Risk Factual Diversifiable Risk Vs Non Diversifiable o Diversifiable Risk Random Affects individuals or small of businesses o Non Diversifiable Not Random Impacts society at large Liability Exposure o Peril Immediate cause of loss o Hazard Enhances the peril increases frequency severity Moral Hazard Vs Morale Hazard o Moral Hazard Results from deliberate act Behavior is different o Morale Hazard Results from carelessness or indifference Attitude is different Cost Burden of Risk o Financial cost cost of Risk Management