1. The concept of Risk
Risk exists when there is uncertainty about the future.
An insurance risk means uncertainty about a financial loss.
A hazard is a condition that may create or increase the chance of loss arising from a given peril.
A peril is a cause of loss e.g. fire, windstorm, hail or burglary.
2. Distinguish between speculative risk and pure risk.
Speculative risk involves three possible outcomes: loss, gain, or no change.
Pure risk involves no possibility of gain; either a loss occurs or no loss occurs
3. List several ways to manage financial risk.
Avoiding risk
Controlling risk
Accepting risk
Transferring
Speculative risk involves three possible outcomes: loss, gain, or no change.
For example, when you purchase shares of stock, you are speculating that the value of the stock will rise and that you will earn a profit on your investment. At the same time, you know that the value of the stock could fall and that you could lose some or all of the money you invested. Finally, you know that the value of the stock could remain the same—you might not lose money, but you might not make a profit.
Pure risk involves no possibility of gain; either a loss occurs or no loss occurs.
An example of pure risk is the possibility that you may become disabled. If you are unable to work, you will experience a financial loss. If, on the other hand, you never become disabled, then you will incur no loss from the risk. This possibility of financial loss without the possibility of gain—pure risk—is the only kind of risk that can be insured. The purpose of insurance is to compensate for financial loss, not to provide an opportunity for financial gain.
An insurable interest exists when the policyowner is likely to benefit if the insured continues to live and is likely to suffer some loss or detriment if the insured dies.