TEMPLE RMI 2101 - Topic 1- Intro and Overview- Risk, Risk Management & Uncertainty

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“Notes – Topic/Chapter 1”Topic 1- Intro and Overview- Risk, Risk Management & Uncertainty- Risks at Temple Universityo What Risks? Personal Injury  Theft – (Tangible property, financial, employee diversion of funds, intellectual- patents- ideas, security breach, cyber security) Natural Disaster/ Fire Finance – tuition/ state of Pennsylvania Reputation 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 Risko Traditional Risk Management ModelUncertainty of outcome- Produces loss to you or the company- Loss is always financial impact - Loss with certainty- Risk ≠ Losso Budget, Plan, AvoidPossibility of Negative Outcome- No indication of likelihood Probability of Loss- Likelihood of outcome or event.- Defining and Quantifying________________________________________________________________________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 VS. Dynamic Risk- Static Risk: o Does not change significantly over time—Always Present for an organization Examples :  Natural Disasters, death, fire, theft.- Dynamic Risk: o Varies due to changing circumstances New Law connected to benefits (Obamacare)- Dependents are covered until age 26 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 VS. Objective Risk- Subjective Risk: o Perceived amount of risk based on an assessment of risk, based on company’s opinion of the risk.- Objective Risk: o Based on Facts—Usually quantifiableo Measurable Variation in uncertain outcomes based on facts and dataSubjective Risk & Objective Risk Differ Based On:- Familiarity & Control- Consequence over Likelihood- Risk Awarenesso 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 companieso **(Random) Example :  Fire in a strip mall that affects one or a small number of businesses- Non-Diversifiable Risk: 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 losso 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:  Flood caused the loss to the beach house (only 1 peril)o Low Frequency ≠ Low Severity o High Frequency ≠ High SeveritySeverity- Severity: (The Size of a loss)o Given that a loss has occurred—How much? Severity is always measured in $o Hazard : (Condition that increases the frequency or severity of a loss) Underlying condition behind the loss Can increase frequency, severity, or both4 Classifications for “Hazards”: Moral—Condition that increases the likelihood that a person will intentionally cause or exaggerate a loss. Morale—Condition of carelessness or indifference that increases the 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 floodedo There are numerous hazards- Peril – o Random event or immediate cause of loss Example:  Flood cause the loss to my beach houseo Only 1 peril________________________________________________________________________***Moral Hazard VS. Morale Hazard***- Moral Hazard: (Condition that increases likelihood that a person will intentionally cause or exaggerate a loss)o Act differently because of the existence of insuranceo Not Necessarily bad Example:  Health Insurance—going to the Doctor more frequently Healthier lifestyleo When is it bad to act differently? Fraud Epitome of Moral Hazard- 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- Morale Hazard: (Condition of carelessness or indifference that increases frequency or severity of loss)o Attitude difference o Because you now have insurance—you act carelessly Examples:  Driving carelessly, failing to lock an unattended building, failing to clear an icy sidewalk to protect pedestrians.***Difference Between Moral Hazard and Morale Hazard***-Moral Hazard – o Condition that increases the likelihood that a person will intentionally cause or exaggerate a loss.- Morale Hazard – o Condition of


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TEMPLE RMI 2101 - Topic 1- Intro and Overview- Risk, Risk Management & Uncertainty

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