PRINCIPLES OF RISK MANAGEMENT AND INSURANCE

DPP 50083 – PRINCIPLES OF RISK
MANAGEMENT & INSURANCE

LECTURER :

PN. ZAIHAN BINTI HARON
[email protected]

TOPIC 1 :
INTRODUCTION

TO

BY : PN ZAIHAN BINTI HARON

DPP 50083 – PRINCIPLES OF RISK
MANAGEMENT & INSURANCE

COURSE LEARNING OUTCOMES (CLO) :
Upon completion of this course, students should be able to:
1. Apply the concept of risk and insurance as a risk transfer

mechanism in International Business. (C3,PLO1)

RISK defined as UNCERTAINTY of loss.
Eg : Being killed in accident and lung
cancer.

BY : PN ZAIHAN BINTI HARON

PERIL AND HAZARD

PERIL : HAZARD :

Peril is defined as Hazard is a condition
the cause of loss. that creates or
increases the
Eg : If your house chances of loss.
burns because of a
fire, the peril or Eg: Slippery floor can
cause of loss, is the increase the chance
fire. to falls.

BY : PN ZAIHAN BINTI HARON

There are four major types of hazards:

Physical Hazard

Legal Hazard Morale Hazard

Moral Hazard

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Types of hazards:

Physical Hazard – Physical condition that increase the
chances of loss. Eg : defective wiring in a building that
increases the chance of fire, defective lock on a door
that increases the chance of theft .

Moral Hazard- Dishonesty or character defects in an
individual that increase the frequency or severity of
loss. Eg : A dishonest employee

BY : PN ZAIHAN BINTI HARON

Types of hazards:

Morale Hazard – Carelessness or indifference to a loss
because of the existence of insurance. Eg: Leaving car
keys in an unlocked car, which increases the chance of
theft.

Legal Hazard – Characteristics of the legal system or
regulatory environment that increase the frequency or
severity of losses. Eg : Statutes that require insurers to
give coverage for alcoholism.

BY : PN ZAIHAN BINTI HARON

The probability theory of risk

A priori probabilities are most often used within
the counting method of calculating probability.
This is because you must use logic to determine
what outcomes of an event are possible in order
to determine the number of ways these
outcomes can occur.

For example, consider how the price of a share
can change. Its price can increase, decrease, or
remain the same.

BY : PN ZAIHAN BINTI HARON

The probability theory of risk

Empirical Probability of an event is an "estimate"
that the event will happen based on how often the
event occurs after collecting data or running an
experiment (in a large number of trials). It is based
specifically on direct observations or experiences.

For example, during the last 15 basketball games,
Sam has made 64 and missed 32 foul shots. What is
the empirical (or experimental) probability that Sam
will make his next foul shot?

BY : PN ZAIHAN BINTI HARON

The probability theory of risk

Judgemental Probability of risk
• Today, we know a lot about many kinds of risks

– Advances in science
– Availability of information through mass media

• As individuals and groups we make decisions
based on how risky we think certain things are

• Different people see different things as
dangerous or acceptable

BY : PN ZAIHAN BINTI HARON

Basic Categories of Risk

a. Pure Risk
b. Speculative Risk

c. Fundamental Risk
d. Particular Risk

BY : PN ZAIHAN BINTI HARON

Normally insurers only insure the pure risks.

However, there are certain requirements to be

fulfilled before pure risk can be insured. There

some requirements of insurable risk :-

► Insurable Interest
► Large Number of Exposure Units
► Accidental and Unintentional Loss
► Financial Value
► No Catastrophic Loss
► Calculable Chance of Loss
► Economically Feasible Premium
► Not Against Public Policy

Definition :-

A systematic process for the identification and
evaluation of risk exposures faced by an
organization or individual and for the selection and
administration of the most appropriate technique
for treating such exposures.

Risk management has important
objectives. These objectives can be
classified as either pre loss or post
loss objectives.

BY : PN ZAIHAN BINTI HARON

PRE LOSS OBJECTIVES POST LOSS OBJECTIVES

►1ST Objective – Firm ►1ST Objective – Survival of
should prepare for the firm.
potential losses in the
most economical way. ►2ND Objective – To continue
operating.
►2ND Objective –
Reduction of anxiety. ►3RD Objective – Stability of
earning.
►3RD Objective – to meet
any legal obligation. ►4TH Objective – Continued
growth of the firm.

►5TH Objective – Social
responsibility is to minimize
the effects that a loss will
have on other persons and on
society.

BY : PN ZAIHAN BINTI HARON

RISK MANAGEMENT PROCESS

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METHOD OF HANDLING RISK

BY : PN ZAIHAN BINTI HARON

BY : PN ZAIHAN BINTI HARON

References :
Main :George E. Rejda (2011). Principles Of Risk Management And

Insurance, Eleventh Edition (ISBN 13 : 978-0-27-376508-0)
Additional :
• Zaihan binti Haron, Armarzila binti Arifin (2016). Principles Of Risk

Management And Insurance, 2nd Edition (ISBN: 978-983-43741-
8-1)

BY : PN ZAIHAN BINTI HARON