ADDIS ABABA UNIVERSTY

NAME dawit admasu

ID NUMBER BEE/8459/11

DEPARTEMENT ACCOUNTING

SECTION 1
 SUBMITSION DATE 5/20/20

1. Objective Vs subjective risk

1.2.Objective risk

 The characteristic of objective risk is that is measurable.

 It can be quantified using statistical or mathematical
technique.

For example assume that an insurer has 100000 cars insured

for a long period of time and on the average 10000cars meet
with at least one accident and claim for damages each year.
However for a particular year it is unlikely that there will be
exactly 10000claims under certain assumption it can be
proven that over a long period of time the deviation of the
number of claim in a year from 10000will on average will be
100 thus there is variation of 100 claims from the expected
number of 100000 or a variation of 1%. This relative variation
of actual loss from expected loss is known as objective risk.
1.3Subjective risk

 Subjective risk is defined as uncertainty based on persons

metal condition or state of mind.
 It can therefore vary from one person to another.

For example for subjective risk Two peoples it the same

situation may have difference perception of the risk and
show markedly different attitudes and responses towards the
risk further perception of risk can be affected by prior
experience.

AA2.Risk Vs uncertainty

2.1.Uncertainty

 A state of mind whereby a sentient entity experience

doubt.
 Uncertainty are unknown
 The argument is for a given state or real world situation
different people would express different intensity of
uncertainty.
 When you fell as if you are not sure if you want to take a
new job or not.
 Example
Using the lower risk example you may be late picking up
your friend from the airport because a meteorite
demolishes your can an hour before you planned to leave
for the airport.

2.2.Risk

 Risk are known unknowns .

 You can predict the possibility of future outcome .
 Risk can be managed.
Example
If you are planning to pick up a friend from the airport
the probability that their flight will arrive hours ate is a
risk you know in advance that their flight will arrive
several hours late is risk you know in advance that arrival
time can change so you plan accordingly.

3. Risk and hazard Peril

3.1Risk

 Risk is the most important things to any insurance

company
  A risk is simply the possibility of a loss.

3.2Peril

 Peril may be defined as the case of a loss.

When using insurance example

 A roof covered with snow can be a physical hazard if the

amount of snow is so great that the roof ultimately
collapses then the snow is the peril
 A fire breaks out in an office building which causes the
sprinkler system to activate. This causes considerable
water damage even though the fire caused the problem
the water damage itself is the peril.

3.3Hazard

 Hazard is a condition that increases the chance of a loss a

rising from a peril.
 Describe anything that increases the potential for a loss

4 .major types of hazard

1 .physical hazards
2. Legal hazards

3. Moral hazards

4. Attitudinal hazard (morale hazard)

1. Physical hazard

 physical hazard increase the likelihood of a loss occurring

due to inadequacies in the condition

For example a roof coved with heavy snow might be

considered a physical hazard when it come to homeowners
insurance

2. Legal hazards

 While increases the likelihood and severity of a loss due to

a condition imposed by the legal process that forces an
insurer to cover a risk that it would otherwise deem
uninsurable.

For example the American legal system legal system

motivates many people to bring litigation suite in order to
realize the potentially lucrative profits in doing.
3. Moral hazards

The name might suggest result from fraudulent acts committed

by an insured.

For example of moral hazards include filling false insurance

claims or misrepresenting oneself on life insurance application
in order to obtain coverage or more favorable coverage term.

4. Attitudinal hazard (morale hazard)

A morale hazard results from unintentional carelessness or

laziness.

5.1Pure Vs speculative risk

5.2Pure risk is referring to the situation in which only a loss

would occur. The only possible outcomes are adverse and
neutral.

For example health and safety (the chance of a disease or

injury).fire 9the probability of a fire that causes injury loss of
life and damage to property).weather (the probability of
unusually bad weather) Crime accidents political war.
5.3 Speculative risk is defined as a situation in which either
profit or loss is possible.

for example one reason buying raw land is considered a

speculation is that besides not generating any income it has
buying /selling cost ongoing taxes and other potential caring
costs these costs are in addition to the uncertainties of the
properties future appreciation potential possible delays in the
expected holding period and limited liquidity .

6. personal risk property risk and liability risk

6.1personal risk

 personal risk are risk that directly affect an individual or

family they involve the possibility of the loss or reduction
of earned income extra expense and the depletion of
financial assets .
 for example exposure to premature death sickness
disability unemployment and dependent old age are
example of personal loss exposures when considered at
the individual /personal level
 poor health and old age
6.2property risk

Personal owning property are exposed to property risks the

risks of having property damaged or lost from numerous
causes .

 for example having you property damaged by wind

lightning

6.3liability risk

Liability risk are another important type of pure risk that most
person face.

 For example essentially you being responsible for

something that happens could lead to lawsuit or anything
of that nature.