Introduction to Risk

By

Dr. Ayesha Rehan

 What is Risk?

⦿  Risk is the possibility of something bad, happening.

⦿ Risk involves uncertainty about the effects of an activity

with respect to something that humans value (such as
health, well-being, wealth, property or the environment), often
focusing on negative, undesirable consequences.

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 Definitions of Risk?
Number of definitions have been proposed for the term risk;
1. Risk is chance of harm
2. Risk is chance of an undesirable outcome
3. Risk is possibility of an outcome being different from the
expectation
4. Risk is the possibility of a loss
5. Risk is uncertainty concerning the occurrences of a loss

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 Definition of Risk
International standard – ISO 31000 defines risk for common understanding
in different applications is “effect of uncertainty on objectives”.

 An effect is a positive or negative deviation from what is expected.

 Positive Effect : Opportunity
 Negative Effect: Threat

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 Components of Risk

⦿ Risk has two important ⦿ Risk exists in the case if;

components
0 < Probability of loss < 1
Uncertainty
Chance ⦿ If probability of loss is 0, then there is
Probability
no risk

Loss ⦿ If probability of loss is 1, then there is

Consequence no uncertainty, loss is certain
Undesirable Outcome
therefore no risk.
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 Risk – Explanatory Example
⦿ The presence of RISK is when putting a revolver with one
bullet up to ahead and pulling the trigger.
⦿ A LOSS is the result of the chamber with the bullet being fired.

⦿ Pulling the trigger and the a revolver is empty, in this case,

there is no RISK because there is no potential LOSS.
⦿ Pulling the trigger and the a revolver is full of bullets, then there
is A LOSS without RISK.
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 What is hazard?
⦿ A hazard is a source or a situation with the potential for
harm.
⦿ A hazard is a condition that creates or increases the
frequency or severity of loss.

⦿ Hazards at work may include noisy machinery, a moving

forklift, chemicals, electricity, working at heights, a
repetitive job, or inappropriate behavior that adversely
affects a worker’s safety and health.
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 Examples of Hazards

1. Physical hazard: body stress, confined space, electricity,

heat, height, noise, vibration etc.

2. Chemical hazard: skin irritants, respiratory sensitizers,

Carcinogens, Reactive, Flammable etc.

3. Safety Hazard: Spills on floor, working on height (ladders,

scaffolding), moving machinery parts etc.

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 Examples of Hazards

4. Biological hazard: Mold and fungi, blood and body fluids,

sewage, airborne pathogens such as the common cold.
stinging insects, harmful plants, bird droppings etc.

5. Ergonomic hazard (relating to efficiency and comfort in the working environment) :

repetition, awkward posture, forceful motion, stationary
position, direct pressure, vibration, extreme temperature, noise,
and work stress.
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 Examples of Hazards
6. Psychological hazard:  stress, fatigue, bullying, violence,
aggression, harassment and burnout etc.

7. Anthropogenic hazard (related to environmental pollution and pollutants)

: criminality, civil disorder, terrorism, war, industrial hazards,
power outage, fire etc.
8. Technological Hazard: industrial pollution, nuclear
radiation, toxic wastes, dam failures, transportation accidents,
factory explosions, fires, and chemical spills.
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 Categories of Hazards

⦿ There are four major categories of hazards :

⦿ Physical hazard

⦿ Moral hazard

⦿ Attitudinal hazard (morale hazard)

⦿ Legal hazard

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 Types of Hazard
1. Physical Hazard
⦿ Physical conditions of the environment that increases the frequency
or severity of loss. Example: Age, job, location of the building etc

2. Moral Hazard
 Moral hazard is dishonesty or character defects in an individual that
increase the frequency or severity of loss. Generally, moral hazard
exists when a person can gain from occurrence of a loss.
 Example: Creating an accident for a car to collect indemnity from
insurance company. Intended delay in fire fighters' request when fire
occurs.
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 Types of Hazard
3. Attitudinal / Morale Hazard
⦿ Morale Hazard: is carelessness or indifference to a loss because of
existence of insurance, which increases the frequency or severity of
a loss.
⦿ Example: Lack of regular car maintenance. Lack in installing a fire
alarm. Careless cigarette smoking that increases the probability of loss by
fire.
⦿ Moral hazard describes a conscious change in behavior to try to benefit
from an event that occurs. Conversely, morale hazard describes an
unconscious change in a person's behavior when he is insured.
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 Types of Hazard
4. Legal Hazard
⦿ Legal hazard: is the characteristics of the legal system
that increase the frequency or severity of losses.

⦿ Example: a court notice about a property, huge demand

verdicts in liability cases or lawsuits, Negligence or
incompetence by doctors or nurses may result in financial
penalties
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 Elements of Hazard and Vulnerability

Exposure
Intensity

Sensitivity

Frequency

Resilience
and
Adaptive
Weakness that may be Capacity
exploited by a threat
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 What is Peril?
 A risk is simply the possibility of a loss, but a 
 Peril is a cause of loss.
 A hazard is a condition that increases the possibility of loss.

 If your house burns because of a fire, the peril, or cause of

loss, is the fire. If your car is damaged in a collision with
another car, collision is the peril, or cause of loss.
 Common perils that cause loss to property include fire,
lightning, windstorm, hail, tornado, earthquake, flood, burglary, and
theft.
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 Example - Difference between Peril, Hazard and Loss

 Example: A clothing store was burned because of leakage of gas from a

nearby factory for chemicals, the damages were estimated at about
Rs.500,000.

 Loss : Rs.500,000
 Peril : Fire
 Hazard: is a nearby factory for chemicals. �

Some things can be both a peril and a hazard. Smoking, for instance, causes
cancer and other health ailments, while also increasing the probability of
such ailments. 
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 Types of Risks
 There are different types of risks — only some are
preventable, and others are not.

 Risk can be categorized in number of ways, however it

can be categorized as to;
 what causes the risk, and
 to whom it affects

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 Non-Financial Risk & Financial Risk

1. Financial Risk: is the risk where the potential loss can be

measured numerically.
 Examples: risk due to fire, earthquake, disability.

2. Non-Financial Risk: is the risk where the potential loss

cannot be measured numerically.
 Examples: risk due to sadness, disappointment. �

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 Pure Risk

1.1 Pure Risk: �

Pure Risk (aka Absolute Risk) : has only two possible
outcomes Loss or No Loss
 In pure risk there is no possibility of gain.
 Examples: risk due to premature death, theft, career-ending,
disabilities, fire, accident etc.

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 Types of Pure Risk
 Pure risk could be classified according to risk exposures
to three major types as follows:

1.1.1 Personal Risk: �

Personal risk is the risks correlated to the ability to earn
income. �
⦿ In general, earning power is subject to such perils:
Premature death, old age, sickness, disability, unemployment.
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 Types of Pure Risk
1.1.2 Property Risk: �
 Property risks: are the risks of property damages.
�Property risks embrace two types of loss: direct loss
and indirect or “consequential” loss.
 Direct loss is the loss of the property itself, and is measured by the
value of the property or the cost of repairing the property.

 Indirect loss results from the loss of use of the asset that is
damaged or destroyed, for the period required to repair or replace the
property.
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Example of Property Risk
 Example: the losses due to a car accident
 Direct loss : the cost of repairing the damages.
 Indirect loss: the cost of renting a car.

 Example: If a house is destroyed by fire

 Direct loss : the lose of the value of the house.
 Indirect loss: the expenses for living somewhere else by
paying, a rent for other flat. This loss of use of the
destroyed house is indirect loss. 
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 Types of Pure Risk
1.1.3 Liability Risks
Liability risk (aka legal risk) involve the possibility of
loss as a result of legal liability.
It is a risk that you might be sued because of neglect,
malpractice, defamation, patent confidentiality or causing
willful injury either to another person or to someone else's
property. Legal risk is the possibility of financial loss if you are
found liable, or the financial loss incurred just defending
yourself, even if you are not found liable.
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 Types of Pure Risk
 Example: Premises Liability

 Risks to a company arising from the possibility of damages

resulting from buying or use of a good or service offered by
that company.

 Liability risk can be identified and reduces through careful

product design, follow the standard and testing..

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 Second Classification of Pure Risk
 Pure risk could be classified according to the number of
individuals that may affected by risk as follows:

 Fundamental (Catastrophic) Risk

 It is a risk that affected the national economy
or too many properties or people in the economy. �
 Examples: Risk due to Natural disasters (Floods, Earthquake,
Hurricanes). Risk due to Economic problem such as rapid
inflation. Risk due to Society problems such as wear.
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 Second Classification of Pure Risk

 Particular (Accidental) Risk 

 Particular Risk is the risk that affected individuals or

limited number of people or properties. �
 Example: Risk due to stealing, risk due to car accident, risk
due to house fire. 

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 Speculative Risk
2. Speculative Risk: Speculative risk is a category of risk
that can be taken on voluntarily and will either result in a
profit or loss. 
Speculative risk has three possible outcomes;
 Loss, No Loss or Gain �
 Examples: purchasing in stock market, financial investment
activities, betting, gambling. �
 Insurance is concerned only with Pure Risk. 
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 Speculative Risk
 Speculative risk differs from pure risk because there is the
possibility of profit or loss, such as investing in financial markets.
 Most speculative risks are uninsurable, because they are undertaken
willingly for the hope of profit.
 Also, speculative risk will generally involve a greater frequency of
loss than a pure risk, since profit is the only other possibility. So
although many people take precautions to protect their lives or their
property, they willingly engage in speculative risks, such as investing
in the stock market, to make a profit; otherwise, a person could avoid
most speculative risks simply by avoiding the activity that gives rise to
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 Static and Dynamic Risks
 Static and dynamic risks are distinguished by their temporality.
 Static Risk
 The possibility of loss is uniform over an extended period of time for static
risks, so static risks are more predictable, and, therefore, more insurable. 
 Example: number of houses that burn down within a given year within a specific
geographical area is steadier, not cyclical, and so is more predictable.
 Dynamic Risk
 Dynamic risks change with time, making them less predictable and less
insurable.
 Example: risk of unemployment changes with the economy, so it is difficult to
predict what unemployment will be next year.
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 What are Controls?
 An unwanted event is a situation or condition where there is a loss of
control of the hazard that leads to harm.
⦿ Controls are the measures put in place to decrease the likelihood or
consequences from an unwanted event. They can:
⦿ prevent the unwanted event or reduce the loss of control of the
hazard (e.g. reduce or contain energy release)
⦿ reduce the effects (e.g. provide shield from hazard; event has happened
but emergency response and medical treatment reduce the severity and
duration of consequences).
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