Chapter 1 Risk and its

treatment
Definition of risk
Risk is
 everywhere in our lives
 defined as uncertainty concerning the occurrence of a loss

Examples:
 You want to sleep for another 15 minutes in the morning, then you face
the risk of being late for class
 A man brings his camera in a trip, then he faces the risk of losing the
camera
 Any person walking across the street faces the risk of being hit by a car

Sources: Rejda, G. E., McNamara, M. (2017). Principles of Risk Management and Insurance, 13 th Edition. Pearson.
Harrington, S. E., Niehaus, G. R. (2004). Risk Management and Insurance, 2 nd Edition. McGrawHill.
Personal risks
 Risks that directly affect an individual or family

 Involve the possibility of

 the loss or reduction of earned income
 extra expenses
 the depletion of financial assets

 Examples of personal risks include:

 Premature death
 Insufficient income after retirement
 Poor health
 Unemployment
Sources: Rejda, G. E., McNamara, M. (2017). Principles of Risk Management and Insurance, 13 th Edition. Pearson.
Harrington, S. E., Niehaus, G. R. (2004). Risk Management and Insurance, 2 nd Edition. McGrawHill.
Personal risks
 Premature death is defined as the death of a family head with unfulfilled
financial obligations

 Financial obligations include:

 dependents to support
 mortgage or loans to be paid off

 If the surviving family members have insufficient replacement income or

past savings to replace the lost income, they will be exposed to economic
security

Sources: Rejda, G. E., McNamara, M. (2017). Principles of Risk Management and Insurance, 13 th Edition. Pearson.
Harrington, S. E., Niehaus, G. R. (2004). Risk Management and Insurance, 2 nd Edition. McGrawHill.
Personal risks
 Having insufficient income after retirement is the major risk associated with
retirement
 In HK, the majority of workers retire between age 55 to age 65
 Some of the occupations are subject to a statutory retirement age, e.g. civil
servants, security personnel
 No universal statutory retirement age for all workers
 In general, you can access and withdraw your MPF benefits upon retiring at the age of
65. Early withdrawal is allowed under specific circumstances, including early
retirement at the age of 60 and permanent departure from Hong Kong
 Retired workers may not save enough for their retirement, expenses include:
 Medical bills
 Long-term care costs
 Housing costs
Sources: Rejda, G. E., McNamara, M. (2017). Principles of Risk Management and Insurance, 13 th Edition. Pearson.
Harrington, S. E., Niehaus, G. R. (2004). Risk Management and Insurance, 2 nd Edition. McGrawHill.
Personal risks – Retirement in HK
 Personal risks
 Poor health can cause great economic insecurity
 The risk of poor health includes
 Payment of catastrophic medical bills
 Loss of earned income
 High demand for public health care in HK, and waiting time for specialist services may be long
 High costs in private hospital, e.g.
inpatient services in private hospital can cost more than HKD$1,000 per day
 Long term disability can cause
 Substantial loss of earned income
 Medical bills
 Loss of employee benefits
 Additional costs of long-term home care
Sources: Rejda, G. E., McNamara, M. (2017). Principles of Risk Management and Insurance, 13 th Edition. Pearson.
Harrington, S. E., Niehaus, G. R. (2004). Risk Management and Insurance, 2 nd Edition. McGrawHill.
 Personal risks
ploym
 Unemployment can result from
 Business cycle downstrings
 Technological and structural changes in the economy
 Seasonal factors
 Currently, HK’s unemployment rate remains high at 6.4%
Common risks to individuals and business firms

Property risks Liability risks

Sources: Rejda, G. E., McNamara, M. (2017). Principles of Risk Management and Insurance, 13 th Edition. Pearson.
Harrington, S. E., Niehaus, G. R. (2004). Risk Management and Insurance, 2 nd Edition. McGrawHill.
Property risks
 Persons owning property are exposed to property risks

 Direct loss: a financial loss that results from the physical damage,
destruction, or theft of the property

 Indirect / Consequential loss: a financial loss that results indirectly from the
occurrence of a direct physical damage or theft loss

Sources: Rejda, G. E., McNamara, M. (2017). Principles of Risk Management and Insurance, 13 th Edition. Pearson.
Harrington, S. E., Niehaus, G. R. (2004). Risk Management and Insurance, 2 nd Edition. McGrawHill.
Peril
 Peril is defined as the cause of loss

 A house burns because of a fire, the peril (cause of loss) is the fire

 Common perils that cause loss to property include fire, lightning,

windstorm, earthquake, flood, theft

Sources: Rejda, G. E., McNamara, M. (2017). Principles of Risk Management and Insurance, 13 th Edition. Pearson.
Harrington, S. E., Niehaus, G. R. (2004). Risk Management and Insurance, 2 nd Edition. McGrawHill.
Liability risks
 A person can be held legally liable if he/she does something that results in bodily injury
or property damage to someone else, e.g.
 Homeowners may be legally liable for unsafe conditions on the premises where
someone is injured
 Dog owners can be held liable if their dog bites someone
 A doctor, lawyer, or other professional may be sued by patients or clients because of
alleged acts of malpractice
 Firms are sued for numerous reasons, including
 Defective products that harm or injure others
 Pollution of the environment
 Injuries to customers
 For liability risks, there is no maximum upper limit with respect to the amount of the loss

Sources: Rejda, G. E., McNamara, M. (2017). Principles of Risk Management and Insurance, 13 th Edition. Pearson.
Harrington, S. E., Niehaus, G. R. (2004). Risk Management and Insurance, 2 nd Edition. McGrawHill.
Systemic Risk - Burden of risk on society
 Systemic risk is the possibility that an event at the company level could
trigger severe instability or collapse in an entire industry or economy

 Large emergency fund, e.g.

 AIG Bailout
 Employment Support Scheme launched by the HKSAR government
 Loss of certain goods and services
 Worry and Fear

Sources: Rejda, G. E., McNamara, M. (2017). Principles of Risk Management and Insurance, 13 th Edition. Pearson.
Harrington, S. E., Niehaus, G. R. (2004). Risk Management and Insurance, 2 nd Edition. McGrawHill.
Techniques for managing risk
 Risk control
 Refers to techniques that reduce the frequency or severity of losses
 Risk control techniques include Avoidance, Loss Prevention, and Loss
Reduction

 Risk financing
 Refers to techniques that provide for the funding of losses
 Risk financing techniques include Retention, Noninsurance Transfers, and
Insurance

Sources: Rejda, G. E., McNamara, M. (2017). Principles of Risk Management and Insurance, 13 th Edition. Pearson.
Harrington, S. E., Niehaus, G. R. (2004). Risk Management and Insurance, 2 nd Edition. McGrawHill.
Risk control techniques
 Avoidance
 Risks can be avoided; however, not all risks should be avoided
 e.g. avoid the risk of being robbed by not staying out too late at night, a business firm can
avoid the risk of being sued for a defective product by not producing the product
 Loss prevention
 Aims at reducing the frequency of loss
 e.g. the number of car accidents can be reduced if motorists take a safe-driving course, strict
security measures at airports and aboard commercial flights can reduce acts of terrorism
 Loss reduction
 Loss prevention can reduce the frequency of losses; however, some losses will inevitably occur
 Aims at reducing the severity of a loss after it occurs
 e.g. a restaurant can install a sprinkler system so that a fire will be promptly extinguished,
thereby reducing the severity of loss

Sources: Rejda, G. E., McNamara, M. (2017). Principles of Risk Management and Insurance, 13 th Edition. Pearson.
Harrington, S. E., Niehaus, G. R. (2004). Risk Management and Insurance, 2 nd Edition. McGrawHill.
Risk financing techniques
 Retention
 An individual retains all or part of the losses that can result from a given risk
 Example of active retention: a motorist may wish to retain the risk of a small collision loss by
purchasing an auto insurance policy with a $500 deductible
 Risk can also be retained passively because of ignorance, indifference, laziness, or failure to
identify an important risk
 Non-insurance transfers
 Transfer of risk by contracts, e.g. the risk of a defective television can be transferred to the
retailer by purchasing a service contract
 Insurance
 Risk is transferred to the insurer (Risk transfer)
 Pooling technique is used to spread the losses of the few over the entire group

Sources: Rejda, G. E., McNamara, M. (2017). Principles of Risk Management and Insurance, 13 th Edition. Pearson.
Harrington, S. E., Niehaus, G. R. (2004). Risk Management and Insurance, 2 nd Edition. McGrawHill.
Insurance: to buy or not to buy