INTRODUCTION TO

RISK
LEARNING OUTCOMES

01 | 02 | 03 |
Define and explain the Describe the concept of Explain the different types
meaning of risk. peril, hazard and loss. of probability theories.

04 | 05 |
Discuss classifications of Distinguish the different
risks types of pure risk
 01

Define and explain the

meaning of risk.
 01

Definition of RISK
Vaughan and Vaughan (2013) defined risk as “a
condition in which there is a possibility of adverse
deviation from the desired outcome that is expected or
hoped for”

Risk–Uncertainty arising from the possible occurrence

of given events, the outcome could leave one in a
worse position ( MII,2019)

In other words, risk implies some form of uncertainty

about an outcome in a given situation and normally the
outcome will be unfavorable or undesirable.
DEFINITION OF RISK

The possibility
of loss

Chance of loss Uncertainty

Possibility of an The dispersion of

unfortunate Risk actual from expected
occurrence results
 “Everything is a risk. Not doing
anything is a risk. It's up to you.”

― Nicola Yoon.
 Elements of Risk
• A state of mind characterized by doubt, based on lack of knowledge
about what will or will not happen in the future.
Uncertainty
• Example : we are not able to predict whether you will involve in road
accident or not.

• The frequency of loss : how often will the loss occur ?

The Degree of Risk
• The severity of loss : how severe will the loss be once it has occurred?

• The actual and active cause of loss under an insurance policy.

Proximate Cause
• In the event of loss where there are many causes, the insurer is only
liable for losses proximately cause by an insured peril.
LEVEL OF RISK

● In insurance, it is usual to have high frequency and low severity incidents

and low frequency and high severity incidents.

○ For example, there are more motor accidents every day as compared
to plane crashes.

○ Motor accidents are frequent but the outcome is less severe whereas
plane crashes seldom occur but the consequences are very high.
 02

Describe the concept

of peril, hazard and
loss.
 HAZARDS
A hazard is a condition that may create or increase the
chance of loss.

Hazards are normally classified into two categories:

a) Physical hazard
b) Moral hazard
Types of Hazard
Physical
• A physical condition that increases the chance of loss.
• Relates to the physical or tangible aspect of risks, which are
likely to influence the occurrence and / or severity of loss.

Moral
• A character defect in an individual that increases the chance
of loss.
• Relates to the character,integrity and mental attitude of a
person.including his actions
• Results from the dishonest tendencies in the character of the
insured person.
 Examples of Hazards

Physical Moral
Hazard Hazard

• Types of construction • Dishonesty or intentionally cause a loss

• The location of property (fraud)
• The occupancy of the building • Exaggerating Claim
• Road & vehicles condition • Speeding
• Poor wiring system • Smoking
• Defective door lock • Carelessness
• Overweight • Poor housekeeping
 Loss
● Loss is a reduction or disappearance of economic value.

Perils Loss
Fire, lightning, explosion property damage, bodily injury, death, loss
of income
Accident (collision or overturning) cost of repair, bodily injury or death, property
damage, legal cost
Burglary, housebreaking, theft loss of property, property damage due to
attempted to theft
Legal liability sued at tort, court awards and legal
expenses
Illness medical cost, loss of income
Premature death funeral expenses, living expenses
 Peril, Hazard and Loss
Peril Perils Hazard Loss
Perils is a cause of loss. • Fire • storage of hazardous • property damage
• lightning materials • bodily injury
Examples : fire, lightning, explosion, • explosion • wooden construction • premature death
accident, natural disasters, legal liability. • left unoccupied • loss of income
• Poor housekeeping • additional expenses
Hazard
Hazard is a condition that increases the
chance of loss. • Motor • poor braking systems • property damage
accident • bodily injury
Examples : physical and moral • engine problems • premature death
• loss of use
Loss • additional expenses.
Loss is a reduction or disappearance of
• Legal liability • negligence • court awards
economic value.
• carelessness • legal expenses
Examples : property damage, bodily • tort
injury, death, loss of income,
unemployment, court awards.
 03

PROBABILITIES
THEORIES
 Probability Theories

• The term probability refers to an area of study which

measures the chance of a particular event occurring.

• It is also can be defined as the likelihood that the event will

occur.

• The three common types of probabilities theories are a

priori probability, empirical probability and judgemental
probability.
A Priori
Probability
● Determined when the total number of
possible events is known.

○ Example: the probability of getting

a six on a roll of dice is 1/6.

● This concept has a limited practical

application in the study of risk because
situations where a number of possible
outcomes are known but very rare.
Empirical
Probability
● Determined on the basis of historical data.

● Example: number of road accidents and

fatalities, fire, flood, critical illness and etc

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licensed under CC BY-NC
Judgemental
Probability
● Determined based on the judgment of the
expert person in predicting the outcome.

● It is used when there is a lack of historical

data or credible statistics.
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Author is licensed under CC

● Examples: Astronaut program by Malaysia BY-NC

and operating a nuclear plant in Malaysia

 04

Discuss classifications
of risks
Classifications of risks

Pure Risk &

Speculative Risk

Fundamental Risk &

Particular Risk

Financial Value Risk &

Non-Financial Value Risk
 05

TYPES OF PURE RISKS

 Pure Risk & Speculative Risk
Pure Risk
• There is only a possibility of loss or no loss.
• No possibility of gain or profit.
• Example : probability of injuries in a road accident.
• Pure risk also can be categorized as personal risk, property risk and
liability risk.

Speculative Risk
• There is possibility of profit or loss.
• Examples : financial investment and gambling.
• Most of the speculative risks are uninsurable since they are undertaken
willingly in hope of profit or gain.
Fundamental Risk & Particular Risk.
Fundamental Risk
• It affects the entire economy or a large number of persons or groups within
the economy.
• It affects the society in general or groups of people, and it cannot be
controlled even partially by any one person.
• Examples: weather and climate, inflation, mass unemployment, natural
disasters.
Particular Risk
• It affects particular individuals.
• Those future outcomes that we can partially control.
• It arises from individual decisions.
• Examples : to further study, to drive a car, to own property.
 Financial Value Risk &
Non-Financial Value Risk

Financial Value Risk

• The outcomes can be measured in monetary terms

• Examples : material damage to property, theft or loss of business profit, fire,
court award for damages.

Non-Financial Value Risk

• The outcomes cannot be measured in monetary terms.

• Examples : selection of career, spouse, restaurant menu items and etc.
• Outcomes and consequences : loss of trust and reputation.
Types of Pure Risk

Personal Risks Property Risks

Liability Risks
Personal Risks

RISK OF PREMATURE DEATH RISK OF OLD AGE

RISK OF POOR HEALTH RISK OF UNEMPLOYMENT

Life Expectancy in Malaysia
 PROPERTY RISKS Direct
Loss
1. Direct loss

■ Damage to property by a peril.

■ Example: if a factory is destroyed by fire, the owner loses the value of the factory.

2. Indirect loss
Indirect
■ Loss in consequence of a direct loss.
Loss

■ Example: The business interruption due to the loss of use of the destroyed assets is indirect loss.

3. Extra expenses

● Extra costs or additional expenses incurred as a result of the loss.

Extra
Expense
● Example: The factory owner will incur additional expenses to rent another building to continuesthe
operation.
 LIABILITY RISKS
● Risk of being sued because of neglect, malpractice, or causing willful injury
either to another person or to someone else's property.

● Possibility of financial loss if you are found liable, or the financial loss incurred
just defending yourself, even if you are not found liable.
 Risk Categories Associated with Hotel and
Tourism Industry
RISK CATEGORY PERILS
Nature • Natural disaster
• Weather and climate conditions
• Environmental conditions
Crime and Safety • Fraud and crime
• Acts of terrorism and hijacking
Health • Infectious diseases
• Malaria
• COVID-19
Political Factors • War
• Political instability
Economic Factors • Exchange rates
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• Rising prices BY-NC-ND
• Economic recession
• Transport
Technology • Information technology (IT)
• Reservation systems
Socio-Demographic • Culture
Factors
Thank you!
“Adventure without risk is Disneyland”
-Douglas Coupland-

This Photo by Unknown Author is licensed under CC BY