For example, the risks of Hurricanes in Florida and the southern and eastern shores of the United States, floods in the Midwestern states, earthquakes in the western states, and terrorism attacks are the types of loss exposures that are associated with fundamental risk. Innovative financial products without appropriate underwriting and risk management coupled with greed and lack of corporate controls brought us to the credit crisis of 2007 and 2008 and the deepest recession in a generation. Fundamental risk is a risk, such as an earthquake or terrorism that can affect many people at once. The creation of the products provided “black boxes” understood by few and without appropriate risk management. are desirable, but some insurable risks do not possess them. (with particular characteristics that are not shared by all) in nature, are often viewed as being amenable to having their financial consequences reduced or eliminated by holding a well-diversified portfolio. Fundamental and particular risks: Particular risk can be confined to individuals or smaller groups.. The question is what is the cost and what is the impact both financially and socially. Lack of careful underwriting of mortgages coupled with lack of understanding of the new creative “insurance” default swaps instruments and the resulting instability of the two largest remaining bond insurers are at the heart of the current credit crisis. The three broad general classes into which the types of insurance may be classified are. Particular Risk. As opposed to fundamental losses, noncatastrophic accidental losses, such as those caused by fires, are considered particular risks. An ongoing concern is the electronic risk (e-risk) generated by the extensive use of computers, e-commerce, and the Internet. refers to the possibility that a manufacturer may be liable for harm caused by use of its product, even if the manufacturer was reasonable in producing it. Another differentiation is by systemic or nondiversifiable risks, as opposed to idiosyncratic or diversifiable risks; this is explained below. Electronic risk, or e-risk, comes in many forms. event giving birth to a loss) can be measured in monetary terms.The losses can be assessed and a proper money value can be given to those losses. The insurance mechanism operated by the Federal Deposit Insurance Corporation. As opposed to fundamental losses, noncatastrophic accidental losses, such as those caused by fires, are considered particular risks. Assuming speculate risk is usually a choice and not the result of uncontrollable circumstances. The ultimate goal of risk management is to. Some coverage is provided through commercial property and liability policies, but traditional insurance policies were not designed to include e-risks. Particular risk are usually insurable. Most data theft is perpetrated by employees, but “netspionage”—electronic espionage by rival companies—is on the rise. attempts to redistribute income in favor of certain classes and is usually compulsory. In fact, standard policies specifically exclude digital risks (or provide minimal coverage). Today, the extreme risks of mismanaged innovations in the financial markets combined with greed are stretching the field of risk management to new levels of governmental and private controls. Pure risk is considered distasteful by most persons because, The terrorist attack on the World Trade Center on September 11, 2001 led to a debate over whether such risks are, The hazard that reflects the tendency in some jurisdictions for judges and juries to favor a plaintiff in litigation is properly classified as. is the packaging and transferring of insurance risks to the capital markets through the issuance of a financial security. the tendency of the poorer than average risks to seek insurance to a greater extent than do the better than average risks. This decade can be named “the decade of extreme risks with inadequate risk management.” The late 1990s saw extreme risks with the stock market bubble without concrete financial theory. to describe the enterprise, property, person, or activity facing a potential loss. Fundamental risk is one that involves the entire community. Insuranceopedia explains Static Risk. Risks whose adverse consequences can be mitigated simply by having a well-diversified portfolio of risk exposures. The type of retention that is always undesirable is, The two broad approaches to dealing with risk are. Therefore, it is important for managers to understand different types of risk. Risks viewed as being amenable to having their financial consequences reduced or eliminated by holding a well-diversified portfolio. Pure risk is a type of risk that cannot be controlled and has two outcomes: complete loss or no loss at all. The combination of a large number of exposure units by an insurer is important for the operation of insurance because: For the insurance company, a meaningful measure of risk is. These risks are extensive and the exposures are becoming more defined. Furthermore, in an era of financial technology and creation of innovative modeling for predicting the most infrequent catastrophes, the innovation and growth in human capacity is at the root of the current credit crisis. Systemic risks that are shared by all, on the other hand, such as global warming, or movements of the entire economy such as that precipitated by the credit crisis of fall 2008, are considered nondiversifiable. In other words a speculative risk is a situation that might also end in a gain. The step in the risk management process that is most likely to be overlooked is, The most difficult step in the risk management process is likely to be. For example, firms might prefer to capture up-side return potential at the same time that they mitigate while mitigating the downside loss potential. Risk management is a very important topic in both Strategic Management and Operations Management. For example, social support programs and employer-sponsored health or pension plan costs can be affected by natural or man-made changes. social insurance, private insurance, and public guarantee programs. Within the class of pure risk exposures, it is common to further explore risks by use of the dichotomy of personal property versus liability exposure risk. Catastrophic risk is a concentration of strong, positively correlated risk exposures, such as many homes in the same location. There are no opportunities for gain or profit when pure risk is involved. Adverse selection is a term used to describe. Earthquake and war are the examples of those. In property insurance terminology, all the following are considered hazards except: a fire which is started in a waste paper basket. The field of risk management deals with both diversifiable and nondiversifiable risks. The increase of awareness and usage of enterprise risk management (ERM) post–September 11 failed to encompass the already well-known risks of high-category hurricanes on the sustainability of New Orleans levies. So who makes those decisions the government, clients and insurers. 15. the exposure has catastrophic potential and the risk cannot be reduced or transferred. a condition that increases the chance of loss. On the other hand, market risk, such as devaluation of the dollar is systemic risk for all firms in the export or import businesses. Property insurance policies typically exclude coverage for losses caused by war. Using different terminology to describe different aspects of risk allows risk professionals to reduce any confusion that might arise as they discuss risks. is similar in many respects to the co-signer of a note. Sources: Harry Croydon, “Making Sense of Cyber-Exposures,” National Underwriter, Property & Casualty/Risk & Benefits Management Edition, 17 June 2002; Joanne Wojcik, “Insurers Cut E-Risks from Policies,” Business Insurance, 10 September 2001; Various media resources at the end of 2005 such as Wall Street Journal and local newspapers. Deposit insurance Corporation disturbance or extremes of temperature and humidity learn what a,... Causing the risks of the greatest risks of E-exposures '' below illustrates the and! 1.3 `` Roles ( objectives ) Underlying the Definition of risk management innovation are also at the same that., exposures are units that are taken to reduce or eliminate risks explored a... Which the types of risk management deals with both diversifiable and nondiversifiable categories '' we provide of! Clearly categorized ; theft of proprietary information costs companies billions of dollars theory in finance and later. 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