CHAPTER 1

RISK AND UNCERTAINTY IN

HUMAN

Concept of Risk
Type of Risk
Method of Handling Risk
Risk Management
Risk in the perspective of Islam

Introduction
What is Risk?

Vaughan and
Vaughan
(2003)

a condition in which there is a possibility of

adverse deviation from a desired outcome that
is expected or hoped for.

trieschman,
Hoyt and
Sommer
(2005)

risk is uncertainty, create both problem and

opportunities for the businesses and individuals
in nearly every walk of life.

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 Risk is uncertainty about the future

outcome of an event.
Traditionally, risk means possibility of
harm, injury or loss. it's describe the
situation where there is uncertainty
about what will be the outcome.
Eg: risk would be of being diagnosed
with lung cancer among smokers as
there will always be an uncertainty
as to whether a smoker will suffer
from cancer or otherwise.

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Concept of Risk
The level of risk determined by the
relationship
between
frequency
and
severity.
This relation is explained by the Heinrich
Triangle where there is a high frequency
the severity will be low and when the low
frequency, the severity will be high
Eg: A plane crash happens very seldom but
when it takes place the severity will be
high.
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Peril & Hazard

Term

Description

Peril
Referred to as the
main cause of a loss
Hazard
Refer to the condition
that increase the
chance of loss

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Example
Fire, flood, collision,
accident, earthquakes
and sickness.

Physical Hazard
Refer to the physical
condition of the
subject matter that
increases the chance
of loss.

Defective wiring in a
building that
increases the chance
of fire

Moral Hazard
Refer to the attitude
of an individual that
increases the chance
of loss.

Internationally
burning unsold
merchandise that is
insured to collect
from an insurer or a
dishonest insured
who exaggerates the

Categories of Risk
Risk

Description

Pure

Possibilities that can

Fire, lightning, flood,
result in only a loss or storm, accident, theft
breakeven (no loss).
etc
Pure risks can
generally be covered

Speculative

Possibilities that can

result in loss, no loss
or profit (gain).
Speculative risks
generally cannot be
covered.

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Example

Investment in the
stock market, foreign
currency fluctuations,
venturing into a new
business.

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Personal Risk
Directly effect individual
It will lead to the possibilities of loss or
reduction of income, extra expenses
incurred and depletion of assets.
Types of personal risk
Risk of premature death
Risk of insufficient income during retirement
Risk of poor health
Risk of unemployment

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Property Risk
The possibility of loss due to damage a property
caused by fire, earthquakes and other natural
disaster
Property
Risk

Description

Example

Direct
Loss

Financial loss that

results from the
physical damage,
destruction or theft

A factory damaged due to

fire. The physical damage to
the factory is a direct loss.

Indirect
loss

Financial loss that

results indirectly
from the occurrence
of a direct physical
damage of theft

The physical damage to the

factory, the owner would
lose his income due to
reduction in turnover whilst
the factory is being repaired.
This will cause loss of
income and would be a
consequential loss.

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Liability Risk
Risk of third party bodily injured or
property damage.
In this case the court may order you to
pay substantial damages to the person
you have injured
Eg Business firms can be held legally
liable for detective products that could
cause bodily injury or property damage
to consumers who use these product.
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Method of handling Risk

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