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1. What is meant by risk?

Risk concerns the deviation of one or more results of one or more


future events from their expected value. Technically, the value of
those results may be positive or negative. However, general usage
tends focus only on potential harm that may arise from a future event,
which may accrue either from incurring a cost or by failing to attain
some benefit.

2. What are the causes of loss?

The causes of loss are:


(i) Perils and
(ii) Hazards.

Perils are of two types:


(i) Open Peril and
(ii) Specific Peril

Hazards are of two types:


(i) Physical and
(ii) Intangible

Intangible Hazards are classified into:


(i) Moral Hazard
(ii) Morale Hazard
(iii) Societal Hazard

3. Describe the classification of risk.

(a) Financial and Non Financial


Financial risk is normally any risk associated with any form of
financing. Risk is probability of unfavorable condition; in financial
sector it is the probability of actual return being less than expected
return.

A non-financial risk should be on comparative basis. Non-monetary


would refer to anything that is not monetary or that which cannot be
associated or viewed in money terms.

(b) Pure and Speculative


Situation where there is a chance of either loss or no loss, but no
chance of gain is known as Pure Risk.
Situation where the possibility of either a financial loss or a financial
gain exists is known as Speculative Risk.

(c) Fundamental and Particular


Exposure to loss from a situation affecting a large group of people or
firms and caused by (i) natural phenomenon or (ii) social phenomenon
is known as Fundamental Risk.

Exposure to loss from a situation associated with specific individual


events is known as Particular Risk.

(d) Dynamic and Static


Exposure to loss from changes in the environment is known as
Dynamic Risk.

Situation not significantly affected by the business environment is


known as Static Risk.

4. What are the components of risk?

i. The first source of risk is project-specific; an individual


project may have higher or lower cash flows than expected,
either because the firm misestimated the cash flows for that
project or because of factors specific to that project.
ii. The second source of risk is competitive risk, whereby the
earnings and cash flows on a project are affected (positively
or negatively) by the actions of competitors.
iii. The third source of risk is industry-specific risk hose factors
that impact the earnings and cash flows of a specific industry.
There are three sources of industry-specific risk—Technology
risk, legal risk and commodity risk.
iv. The fourth source of risk is international risk. A firm faces
this type of risk when it generates revenues or has costs
outside its domestic market.
v. The final source of risk is market risk: macroeconomic
factors that affect essentially all companies and all projects,
to varying degrees.

5. Explain risk management process.

The risk management process involves:

a) Establishing the context


Establishing the context involves:
1. Identification of risk in a selected domain of interest
2. Planning the remainder of the process.
3. Mapping out the social scope of risk management.
4. Defining a framework for the activity and an agenda for
identification.
5. Developing an analysis of risks involved in the process.
6. Mitigation or Solution of risks using available technological, human
and organizational resources.

b) Identification
After establishing the context, the next step in the process of
managing risk is to identify potential risks. Risks are about events that,
when triggered, cause problems. Hence, risk identification can start
with the source of problems, or with the problem itself.
• Source analysis Risk sources may be internal or external to the
system that is the target of risk management.
Examples of risk sources are: stakeholders of a project, employees of a
company or the weather over an airport.
• Problem analysis Risks are related to identified threats. For example:
the threat of losing money, the threat of abuse of privacy information
or the threat of accidents and casualties. The threats may exist with
various entities, most important with shareholders, customers and
legislative bodies such as the government

c) Assessment
Once risks have been identified, they must then be assessed as to
their potential severity of loss and to the probability of occurrence.
These quantities can be either simple to measure, in the case of the
value of a lost building, or impossible to know for sure in the case of
the probability of an unlikely event occurring. Therefore, in the
assessment process it is critical to make the best educated guesses
possible in order to properly prioritize the implementation of the risk
management plan.

6. What are the methods of handling risk?

The methods of handling risk are:


1. Avoidance
2. Reduction
3. Retention
4. Combination
5. Transfer
6. Hedging
7. Research Method
7. Explain different types of insurance.

1. Life Insurance
Insurance cover that serves two major purposes:
(1) to substitute for the insured's income if he or she dies, and
(2) to qualify the insured for favorable tax treatment.

The policy holders buy insurance cover from an insurance company,


and pay specific periodic amounts (premiums) for the term (duration or
life) of the policy. If the insured dies before the term is completed, a
guaranteed sum (the face amount of the policy) is paid to one or more
named beneficiaries. If the insured survives the term then, depending
on the type of the policy, he or she may receive the full or a part of the
face amount of the policy. For young families, a life insurance policy
creates an 'instant estate' before they have enough time to
accumulate other assets. And it provides liquidity to the named
beneficiary (or beneficiaries) long before the deceased's estate
matters (which often call for substantial expense) are settled.

2. Marine Insurance
Coverage against loss of or damage to a ship; and in-transit cargo loss
or damage over waterways, land, and air.

3. Fire Insurance
Standard fire policy that usually covers fire due to any cause, subject
to some exceptions which too may be covered with additional
premium.

4. Motor Insurance
It is insurance purchased for cars, trucks, and other vehicles.

5. Personal Accident Insurance


Personal Accident is an insurance cover wherein, in the event of the
person sustaining bodily injuries resulting solely and directly from an
accident caused by EXTERNAL, VIOLENT & VISIBLE means , resulting
into death or disablement.

6. Crop Insurance
Crop insurance is purchased by agricultural producers, including
farmers, ranchers, and others to protect themselves against either the
loss of their crops due to natural disasters, such as hail, drought, and
floods, or the loss of revenue due to declines in the prices of
agricultural commodities.

8. Explain the following terms.

i. Insurance: Risk-transfer mechanism that ensures full or partial


financial compensation for the loss or damage caused by
event(s) beyond the control of the insured party. Under an
insurance contract, a party (the insurer) indemnifies the other
party (the insured) against a specified amount of loss, occurring
from specified eventualities within a specified period, provided a
fee called premium is paid.

ii. Insured: Entity or property covered under an insurance policy


against insured perils.

iii. Assured: Legal owner or beneficiary of a life insurance policy.


He or she has the control (subject to some exceptions) of the
sums realized from proceeds of the policy at its maturity, or upon
death of the person covered under the policy.

iv. Assurance: Insurance cover against an eventuality that (sooner


or later) must occur; death of the person covered under a life
insurance policy being the common one.

v. Policy: Formal contract issued by an insurer that contains terms


and conditions of the insurance cover and serves as its legal
evidence.

vi. Subject Matter: Anything in respect of which there is a risk of


loss from perils may be the subject of insurance.
vii. Insurable interest: True, valid, determinable, and direct
economic stake of an insurance policy holder (or of the
beneficiary of the policy) in the continued existence or safety of
the insured property or person.

viii. Policy: It is a contract between the insurer and the insured,


known as the policyholder, which determines the claims which
the insurer is legally required to pay.