peril is defined as the cause of the loss
hazard is a condition that increases the chance of loss
Physical hazards are physical conditions that increase the chance of loss (icy roads,
defective wiring)
Moral hazard is dishonesty or character defects in an individual, that increase the chance of
loss (faking accidents, inflating claim amounts)
Morale Hazard (Attitudinal Hazard) is carelessness or indifference to a loss because of the
existence of insurance (leaving keys in an unlocked car)
Legal Hazard refers to characteristics of the legal system or regulatory environment that
increase the chance of loss (large damage awards in liability lawsuits)
pure risk is one in which there are only the possibilities of loss or no loss (earthquake)
speculative risk is one in which both profit or loss are possible (gambling)
Enterprise risk encompasses all major risks faced by a business firm, which include: pure
risk, speculative risk, strategic risk, operational risk, and financial risk
fundamental (or non-diversifiable) risk affects the entire economy or large numbers of
persons or groups (hurricane)
particular (or diversifiable) risk affects only the individual (car theft)
In the absence of insurance, individuals would have to maintain large emergency funds
…..The risk of a liability lawsuit may discourage innovation, depriving society of certain
goods and services….Risk causes worry and fear
Risk Control
Avoidance (e.g. avoiding crime infested localities)
Loss prevention refers to activities to reduce the frequency of losses (e.g. inspection and
safety programs)
Loss reduction refers to activities to reduce the severity of losses (e.g. fire extinguisher)
Risk Financing
Retention
• An individual or firm retains all or part of a loss
• Loss retention may be active or passive
