Introduction to risk and insurance

1. The concept of risk

2. Risk Management.
3. Managing personal risk through insurance.

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The concepts of risk

1. Speculative risks:
It involves three possible outcomes, loss,
gain, or no change. For instance purchase
shares of stock.
2. Pure risk:
It involves no possibility of gain, either loss
or no loss. For instance that one may can
become disable.

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Risk Management

To reduce our exposure to a specific

financial risk, we can choose any of at
least four options.
1. Avoiding risk
2. Controlling risk
3. Accepting risk
4. Transferring risk

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Managing risk through insurance

Insurers use a concept known as known as

risk pooling. With risk pooling, individuals
who face the uncertainty of a particular
economic loss – for example the loss of
income because of disability – transfer this
risk to an insurance company.

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Characteristics of insurable risk

1. The loss must occur by chance.

2. The loss must be definite.
3. The loss must be significant.
4. The loss rate must be predictable.
5. The loss must not be catastrophic to the
insurer.

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Insurability of specific risk

The five characteristics we just described are

useful in identifying the general kinds of
losses that are insurable and provide helpful
framework for the study of insurance
products and principles. But insurance is sold
on case-by-case basis and insurer consider
a number of factors in order to determine
whether a proposed risk is an insurable risk.

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Questionnaire

1. How will you differentiate speculative risk

and pure risk?
2. What are the various ways of managing
risk?
3. What are the various characteristics of
insurable risk?

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