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Question and Answer

1. List the major types of pure risk that are associated with great feconomic/financialy insecurity.

Pure risks associated with great financial and economic insecurity include the risks of premature
death, insufficient income during retirement, old age, poor health, and unemployment. In addition,
persons owning property are exposed to the risk of having their property damaged or lost from
numerous perils. Finally, liability risks are also associated with great financial and economic insecurity.

2. Explain the difference between pure and speculative risk.

Pure risk is the risk which only the possibility of loss or no loss. It means there will be loss a negative
or adverse condition or there will be no loss a neutral condition. While, Speculative risk is the rsik
with the possibilty od occurance of profit or loss exist. At happening of an event the result qwill be
either the profit or loss.

3. Historical Definition of Risk

The study of risk management began after World War II. Risk management has long been associated
with the use of market insurance to protect individuals and companies from various losses associated
with accidents. Other forms of risk management, alternatives to market insurance, surfaced during the
1950s when market insurance was perceived as very costly and incomplete for protection against pure
risk. The use of derivatives as risk management instruments arose during the 1970s, and expanded
rapidly during the 1980s, as companies intensified their financial risk management. International risk
regulation began in the 1980s, and financial firms developed internal risk management models and
capital calculation formulas to hedge against unanticipated risks and reduce regulatory capital.
Concomitantly, governance of risk management became essential, integrated risk management was
introduced, and the chief risk officer positions were created. Nonetheless, these regulations, governance
rules, and risk management methods failed to prevent the financial crisis that began in 2007.

4. ASUS Co. is an oil and gas co. operating in Southeast Asia. The management decided to expand its
commodity-based business to countries in Asia and Europe. What type of risk may be faced by the
corporation and what are the techniques that can be used to manage these risks?
5. There are several techniques available for managing risk. For each of the following risk s, identify an
appropriate technique, or combination of techniques, that would be appropriate for dealing with the

a) A family head may die prematurely because of a heart attack.

• Risk transfer. A person who buy a life insurance, it can help family transfer risk to insurance
• Risk retention. He may do some saving or investment to accumulate money. It may help his family
members if he die, they can continue sustain their family financial.
• Risk prevention. As a person, he should do more healthy life style(health exercise and avoid
smoking/alcohol) to prevent die prematurely.

b) An individual’s home may be totally destroyed in a hurricane.

• Risk retention. Insurance company will not be allow the building was destroyed in a hurricane claim
by the buyer. So a homeowner need to set aside funds to compensate for losses that might occur. • Risk
avoidance. People can choose a place without hurricane.
• Risk reduction. A homeowner can build a stronger home to reduction the severity of loss.

c) A new car may be severely damaged in an auto accidents.

• Risk control. People must take action to reduce the possibility of the loss from occurring by drive the
car safety and slowly. Besides that, people also can buy a quality car. This may prevent major losses
occurring by the car can be damaged by an auto accident.
• Risk avoidance. People can avoid drive the new car to prevent in an auto acciden
• Risk transfer. A person who buy a motor insurance, it can help themselves transfer risk to insurance
• Risk retention. He may set aside money. It can help him to repair the car when his car getting acciden

d) A negligent motorist may be ordered to pay a substantial liability judgement to someone who is
injured in an auto accident.

• Risk transfer. A negligent motorist may transfer risk to insurance company if he got buy the motor
insurance contract forthird party. He can call the victim claim the injury compensation from insurance

• Risk Avoidance. A person who is a negligent motorist, they may avoid to drive.