Risk Management & Insurance Planning

Pure risk involves only the chance of loss or no loss (e.g., fire, death, disability) and is insurable; speculative risk involves a chance of loss, no change, OR gain (e.g., gambling, business ventures) and is generally not insurable.

Objective risk is the measurable variation of actual losses from expected losses (declines as the number of exposures grows, per the law of large numbers); subjective risk is an individual's psychological perception or uncertainty about loss.

A peril is the direct cause of a loss (fire, theft, windstorm). A hazard is a condition that increases the likelihood or severity of a loss from a peril.

Physical hazard = a tangible condition increasing loss (icy steps). Moral hazard = dishonesty/character increasing loss (deliberately filing false claims). Morale hazard = carelessness or indifference because insurance exists (leaving doors unlocked).

Risk avoidance (eliminate the exposure), risk reduction/control (lessen frequency or severity), risk retention (self-insure/accept), and risk transfer (shift to an insurer). Mnemonic: avoid, reduce, retain, transfer.

High severity / low frequency → transfer (insure). Low severity / high frequency → retain. Low severity / low frequency → retain. High severity / high frequency → avoid.