RMI 3011 Chapter 1 Notes Risk a situation involving exposure to danger Uncertainty concerning the occurrence of a loss Possibility of loss on the person or entity that is insured Probability or threat of damage injury liability loss or other negative occurrence that it caused by external of internal vulnerabilities and that may be avoided through preemptive action Different types of risk o Pure static risk category of risk in which either total loss or no loss at all is the only possible outcome people can NOT intentionally take on a pure risk Personal Premature death Insufficient retirement income Poor health Unemployment Property Liability Real vs personal risk Direct vs indirect Premises hazards Product liability Professional liability Contractual liability Environmental impairment liability Employment related practices liability o Speculative risk a situation in which either profit or loss is possible o Static risk pure risk o Dynamic risk speculative o Fundamental risk risk caused by a natural phenomenon such as earthquake flood hurricane OR social phenomenon such as inflation unemployment war sometimes insurable o Particular risk risk from a situation with specific individual events such as a break in or robbery usually insurable o Objective risk the relative variation of actual loss from expected loss o Subjective risk person s perception of the likelihood of an event inaccurate Chance of loss may be identical for two different groups but objective risk may be quite different Burden of risk on society o Emergency funds o Loss of goods or services o Fear and worry Peril cause of loss Hazard condition that increases the probability of loss o Physical o Moral o Morale o Legal Techniques for Managing Risk o USUALLY insurance o Risk control Avoidance Loss prevention Loss reduction o Risk Financing Retention retained costs Self insurance setting aside money Transferring Insurance Hedging making an investment to reduce the risk of adverse price movements in an asset Incorporation process of legally declaring a corporate entity as separate from its owners Can raise capital through sale of stock receives more lenient tax restrictions on loss carry forwards lower tax rate than on personal income protects owner s assets against the company s liabilities
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