THE PROBLEM OF RISK

OBJECTIVES

When you have finished this chapter, you should be able to

• Define and explain the meaning of the term risk

• Distinguish among the terms risk, peril, and hazard

• Identify and explain the classes of hazards

• Differentiate between pure risk and speculative risk

• Differentiate between fundamental and particular risk

• Describe the categories into which pure risk may be subdivided

• Identify and explain the principal methods of handling risk

You can see the entangled metal of the two cars that crashed into the interstate freeway. The siren screams and the fire engine makes the street run. You can see the building in your neighborhood burns and an ambulance running in the hospital. Such tragic events evoke your interests and emotions. After the noise and excitement disappears you appreciate what loss did not happen to you and you may feel sorry for those who suffered loss. But I'm glad that it is not you. Such loss will happen to some people, but others live happily liberated from misfortune. The fact that these losses and similar events can happen to you, and the fact that you can not reliably tell if you really want to do is what we call risk. Risk is an extensive state of existence of human beings. Instinctive understanding of the concept of risk is well-defined, but when used in a particular field, terms with simple meanings in everyday use may include technical terms. In this chapter we will consider the concept of risk as a fundamental problem of insurance contracts. In addition, we will also consider some related concepts.