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SUBJECT:
RISK MANAGEMENT AND INSURANCE

Lecturer: Dr. Le Quy Duong

Faculty of Insurance – NEU
Email: duonglq@neu.edu.vn
Mobile: 0966973642
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Topic 1.
Introduction to Risk Management
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Content
1. Concept of risk
2. Classification of risk
3. Introduction to risk management
4. Risk management process
5. Risk management for individuals
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1. Concept of Risk
• Could you give an example of risk?
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Molave storm in Quang Binh

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Flood in Haloi
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Fire in karaoke bar (Tran Thai Tong Street)

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Can Tho bridge collapsed

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Labour accidents
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Traffic accidents
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Airplane accidents
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1. Concept of Risk
• What is risk: the chance of loss; the possibility of a loss;
uncertainty; the difference between actual and expected results; the
probability of an outcome different from the one expected.

• Risk is a condition where there is a possibility of an adverse deviation

from an expected outcome.

• Indeterminacy: the outcome must be uncertain;

• Loss: at least one of the outcomes is less desirable than expected
• Variability in possible outcome: this draws attention to the degree of risk
that exists in given situations.
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• Uncertainty and its relationship to risk

• Uncertainty is present when there is doubt about future events.
• The existence of risk – a condition that entails the possibility of loss
– creates uncertainty in the mind of individuals when risk is
recognized
 Risk creates uncertainty about future events when risk recognized

• Uncertainty is subjective and is based on a person’s

perception of risk
• Risk is objective and reflects the external state of the
world.
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• Measurement of risk
• The probability of an adverse deviation from an expected outcome
indicates the presence of risk.
• The degree of risk is related to the likelihood of occurrence and is a
measure of the accuracy with which the outcome of an event based
on chance can be predicted.
• The probability of a loss occurring is between 0 and 1
• An important aspect of risk relates to its variability of
outcomes
• Variability implies different degrees of risk in given situations
• Risk is measured by a statistical concept called standard deviation.
Which indicates more or less risk.
• The magnitude of a loss can also be an indication of risk
• The law of large numbers – which is very important in insurance
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Attitudes toward Risks

• People are risk averse;
• A risk seeker;
• risk neutral
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• Risk vs. peril and hazard

• Perils:
• Perils are immediate causes of loss; including: natural
perils, human perils and economic perils.
• Natural perils are those causes of loss over which people have
very little control (epidemic diseases, tsunami, earthquake, …)
• Human perils are those causes of loss over which individuals
have full control (accidents, Fire and smoke, …)
• Economic perils are causes of loss over which humans can be
considered to exert an influence and are considered uninsurable
(employee strikes, economic crisis, …).
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• Risk vs. peril and hazard

• Hazards:
• A hazard is a condition that increases the probability of losses, their
severity or both, including tangible and intangible.
• Tangible hazards: are physical hazards – the tangible conditions
present in the environment that affect the frequency and/or severity
of loss. (Examples)
• Intangible hazards: relate to people’s attitudes and non-physical
cultural conditions that affect the probability and severity of loss;
include moral hazards, morale hazards and legal hazards.
• Moral hazards: refer to the deliberate creation of a loss to defraud an
insurer.
• Morale hazards: refer to carelessness or indifference to a loss because
of the existence of insurance.
• Legal hazards: refer to the increase in the probability or severity of loss
that arises from court judgment or Acts
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• Risk vs. peril and hazard

Example 1: A leaf-roof caught fire, leading damage/loss.

The leaf-roof
Outcome of
increases probability Fire is cause of
peril:
or severity or both: loss: peril
Loss/damage
Hazard
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• Risk vs. peril and hazard

Example 2: A house by the river was unfortunately flooded.

The proximity of the

house to the river
Causes of loss:
increases probability or
peril
severity or both:
Hazard
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2. Classification of risk
• Financial and non-financial risks:
• Financial risk refers to those situations that involve financial
consequences; non-financial risk refers to such factors as meeting
community expectations, environment impact, and compliance with
local laws or international conventions.
• Dynamic and static risks:
• Dynamic risks are risks resulting from changes in the economy; static
risks are risks that occur independently of economic changes.
• Pure and speculative risks:
• Pure risk refers to situations that involve only the possibility of loss or
no change in condition; speculative risk refers to a situation where
there is the probability of loss or gain.
• Fundamental and particular risks:
• Fundamental risk is a risk that affects to entire economy or large
numbers of individuals or groups within economy; a particular risk is
one that affects only individuals and not the entire community.
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• Classification of pure risk:

• Exposure: describes the condition of vulnerability of a person or
property to loss or losses.
• Personal risks: are risks that directly affect an individual. Personal
exposures involve the possibility of a complete loss or reduction in our
ability to earn income, extra expenses; and a reduction of financial
assets caused by the following perils: death, old age, sickness or
accident, unemployment.
• Property risks: arise from the loss of property through its
vulnerability to destruction or theft; include direct and indirect or
consequential loss.
• Liability risks: result from the intentional or unintentional injury to
other people or damage to their property through negligence
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3. Introduction to risk management

• The term ‘’risk management’ is used in many
circumstances
• In the subject, “risk management’ mentions to manage
pure risks of individuals, firms, enterprises, non-profit
organizations.
• Definition of risk management: “the systematic application
of management policies, procedures and practices to the
tasks of communicating, establishing the context,
identifying, analyzing, evaluating, treating, monitoring and
reviewing risk” (John Teale, 2008, p.17)
 specific core principles
(Defined by the International Standards Organization; ISO)

• 1. The process should create value

• 2. It should be an integral part of the organizational process
• 3. It should factor into the overall decision-making process
• 4. It must explicitly address uncertainty
• 5. It should be systematic and structured
• 6. It should be based on the best available information
• 7. It should be tailored to the project
• 8. It must take into account human factors
• 9. It should be transparent and all-inclusive
• 10. It should be dynamic and adaptable to change
• 11. It should be continuously monitored and improved upon
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as the project moves forward
Principles of risk management and
appropriate implementation
• Stakeholders of risk management:

government

Non-profit
NGOs
organizations
Risk
management

Enterprises
Households 24
The risk management process

Communicate and consult ESTABLISH THE CONTEXT

Monitor and Review

RISK ASSESSMENT

RISK ASSESSMENT
IDENTIFY RISKS

ANALYSE RISKS

EVALUATE RISKS

TREAT RISKS

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Principles of risk management and
appropriate implementation
• Risk management tools:
• Risk avoidance
• Risk prevention
• Loss reduction
• Risk finance:
• Reserves for exposure losses
• Insurance

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Principles of risk management and
appropriate implementation
• Risk avoidance
• This may seem obvious, but it is an actual technique.
• There are instances where a perceived risk can be
avoided entirely if certain steps are taken.
• How to avoid the traffic accident?.

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Principles of risk management and
appropriate implementation
• Risk prevention :
• While some risks cannot be avoided, they can be
prevented.
• Whatever the case, preventing a risk reduces the
impact it will have on your project.

Loss reduction :
• Salvage and Stop loss efforts

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Principles of risk management and
appropriate implementation
• Risk finance:
• Retention: Reserves for exposure losses
• Insurance:
• State insurance: social insurance, health insurance
(UHC), unemployment insurance (unemployment
benefit)
• Private insurance: General insurance; Health, life
and annuity insurance
• Micro-insurance

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Principles of risk management and
appropriate implementation
• Risk management:
• Training programs
• Healthcare plan
• Insurance
• Protection from disaster

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Principles of risk management and
appropriate implementation
• Government • Enterprises
(central and
local levels)

disaster health

Unemploymen Accident/
t and old age
disability

• Household • Organizations

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4. Risk management process

• Risk management is an ongoing process, can be divided
into 5 steps:
• Step 1: defining objectives
• Step 2: identifying and measuring potential loss exposures
• Step 3: evaluating potential loss exposures
• Step 4: selecting the most appropriate risk management techniques
• Step 5: implementing and monitoring the program
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• Step 1: defining objectives

• Defining what are the objectives of the risk management program?
• Retain those risks that will not significantly affect the firm’s financial
strength in the event of a loss.
• Treat all potential losses as if they are retained by the firms
• Insure all risks that are not retained
• Guarantee for the survival of the firm after risk happened
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• Step 2: Identifying potential loss exposures:

• Risk profiling
• Types of loss exposures:
• Direct property losses
• Loss of income and extra expenses following property losses
• Legal liability losses
• Losses caused by the death, disability or unplanned retirement of key
personnel.
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• Step 3: evaluating and measuring potential loss exposures:

• Determine the frequency and the severity of each type of loss
exposure
• Estimate maximum possible loss and maximum probable loss:
• Maximum possible loss refers to the worst loss that could possibly
happen to the organization during its lifetime.
• Maximum probable loss refers to the maximum amount of damage that a
peril could cause under normal conditions.
• This step is based for the step 4: chooses the appropriate tools to
manage these risks.
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• Step 4: Selecting appropriate risk management tecniques:

• Risk control:
• Risk avoidance
• Risk prevention: to reduce the frequency/probability of loss
• Loss reduction: to reduce the severity of loss after it occurs.
• Risk financing:
• Risk retention: active risk retention, passive risk retention
• Self-insurance, captive insurance company: Stop loss reinsurance mechanisms
• Risk transference: insurance
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• Step 5: implementing and monitoring the program:

• Evaluating and reviewing the risk management program
• Risks are constantly changing
• Risk management is an ongoing systems process
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• Rules of risk management:

• Don’t risk more than you can afford to lose
• Consider the odds
• Don’t risk a lot for a little
• Insure the big risks; retain the small risks