risk in insurance law

Question 1

Concept of Risk

Answer 1

a. the term risk is a psychological and relative term or phenomenon.
b. for insurance purposes, a risk is defined as uncertainties of loss.
c. thus risk may be defined as ‘as an uncertainty of financial loss with an occurrence of an unfortunate event’

Question 2

the concept of risk includes

Answer 2

i) an unwanted event which may or may not occur
ii) the cause of an unwanted event which may or may not occur
iii) the probability of an unwanted event which may or may not occurs.
iv) the statistical expectation value of unwanted events which may or may not occur
v) the fact that a decision is made under the conditions of known probabilities (decision under risk)

Question 3

the meaning of risk

Answer 3

a. risk means uncertainty of loss.
b. a risk is often understood in the terms of probability of loss.
c. as the probability of outcome increases, the uncertainties as to its occurrence decreases, the uncertainty of loss is the basic characteristics of risk.

Question 4

definition of risk

Answer 4

according to frank knight ‘risk is a measurable uncertainty’
Irving defines risk as ‘a combination of hazards measured by probability’
according to A.H. Willet, ‘ Risk is an objectified uncertainty regarding the occurrence of an undesirable event.’

Question 5

causes of risk:

Answer 5

1. natural: geographical, seasonal, natural calamities etc.
2. unnatural: human forces, economic forces, policies by the government
3. other: insufficient management, obsolescence, lowering the qualities of products, adulteration in food articles of consumption, money market etc.

Question 6

classification of risks

Answer 6

i) pure and speculative
ii) insurable and non-insurable
iii) financial and non-financial
iv) dynamic and static

Question 7

i) Pure and speculative

Answer 7

pure: No prospect of gain, only loss.
types:
Property Damage Risk- risk of loss to personal belongings due to theft, accident, fire and natural disasters
liability risk- the risk of loss resulting from your being held responsible for harming others or their property
personal risk: risk of death, poor health or outliving savings
Speculative: offers the possibility of gain or loss.
these are generally not insurable

Question 8

ii)insurable and non-insurable

Answer 8

insurable:A risk that causes loss that can be covered by the premium paid.
non-insurable: Risk not covered by insurance that leads to loss. AKA prohibited risk.

Question 9

iii)financial and non-financial

Answer 9

financial: The probability of loss inherent in financing methods which may impair the ability to provide an adequate return.
non-financial: Non-Financial Risk can be related to compliance failures, misconduct, technology, or operational challenges, has only a downside. And the downside is large.

Question 10

iv)dynamic and static

Answer 10

Static risks are risks that involve losses brought about by irregular action of nature or by dishonest misdeeds and mistakes of man. Static losses are present in an economy that is not changing (static economy) and as such, static risks are associated with losses that would occur in an unchanging economy.
Dynamic risk is risks brought about by changes in the economy. Changes in price level, income, tastes of consumers, technology etc (which is examples of dynamic risk) can bring about financial losses to members of the economy.