Which of the following refers to a condition that may increase the chance of loss

Overview

Risk management is the continuing process to identify, analyze, evaluate, and treat loss exposures and monitor risk control and financial resources to mitigate the adverse effects of loss.

Loss may result from the following:

• financial risks such as cost of claims and liability judgments
• operational risks such as labor strikes
• perimeter risks including weather or political change
• strategic risks including management changes or loss of reputation

Enterprise Risk Management, expands the province of risk management to define risk as anything that can prevent the company from achieving its objectives.

Although accidental losses are unforeseen and unplanned, there are methods which can make events more predictable. The more predictable an event, the less risk is involved since the occurrence can prevented or mitigated; or, at minimum, expenses can be estimated and budgeted. It is this process to make loss more predictable that is at the core of insurance programs.

The key to an economical and efficient risk program is control over the risk management functions with assurance that actions performed are desirable, necessary, and effective to reduce the overall cost of operational risk.

A risk management program is formulated and evaluated around the cost of risk.

The cost of Risk is comprised of:

• Retained Losses - Deductibles, Retention or Exclusions
• Net Insurance Proceeds
• Cost for Loss Control Activities
• Claim Management Expense
• Administrative Cost to Manage the Program

The benefits of a risk program should result in overall savings to the corporate entity when evaluating these components in the aggregate. Any one specific category may show an increase or decrease in cost when considered individually or by division in a specific time frame.

Types of Loss Exposures within the province of risk management include:

• Property - Real & Personnel, Tangible & Intangible
• Net Income - Reduction in Revenue or Increase in Expense; can be due to loss of Property (yours or suppliers, or customers) or loss due to Civil or Statutory fines and judgments, or by loss of Key Personnel
• Liability - Civil and Statutory (Torts, Statutory Workers Compensation, EPA and other Administrative laws)
• Personnel - Through Death, Disability, or Retirement Key Personnel or catastrophic loss to many employees

Risk management strategies involve many concepts. Some of them include the following concerns:

Elements of Loss Expense

• Actual damages to physical assets to repair or replace.
• Increase in expenses or reduction of revenue due to loss.
• Cost of investigation, legal fees, fines and awarded judgments.
• Loss of worker productivity and adverse publicity and public opinion.
• Higher potential insurance premiums.
• Payments made due to the death, disability or resignation of employees.

Risk Control Techniques

• Avoidance of activities which cause loss.
• Reduction of the frequency of loss - risk prevention.
• Reduction of the severity of loss - risk reduction.
• Contractual transfer of responsibility for loss occurrence.

Risk Financing Techniques

• Retention of losses either by design or omission.
• Borrowing of funds or use of bonds or use of other forms of capital
• Contractual non-insurance transfer of responsibility for loss payment.
• Insurance transfer to a non-owned insurance company when and if the exposure is insurable and the cost is not prohibitive.

Risk Management is concerned with all loss exposures, not only the ones that can be insured. Insurance is a technique to finance some loss exposures and, therefore, a part of the broader concept of managing risk; not the other way around.

The words "peril' and "hazard" may seem virtually synonymous but they mean very different things in the insurance industry.

A peril is a potential event or factor that can cause a loss, such as the possibility of a fire that could engulf a house.

A hazard is a factor or activity that may cause or exacerbate a loss, such as a can of gasoline left outside the house door or a failure to regularly have the brakes of a car checked.

Essentially, a hazard makes a peril more likely to occur or makes it worse.

Key Takeaways

• A peril is a potential adverse event.
• A hazard makes that event more likely.
• Hazards are divided into three classifications: physical, moral, and morale.

Peril

Peril means danger, and it has a connotation of imminent danger. A rockslide is a peril to anyone standing underneath the cliff when the rocks start sliding.

In insurance contracts, the perils that are covered are usually specified. Fire, wind, water, and theft, are the perils that are commonly listed. However, note that the language may indicate that the damage will not be covered in certain circumstances, such as if the insurance company finds that neglect by the insured caused the damage or made it worse.

This is the root cause of many disputes between insurer and insured. For example, the insurer may deny a claim for roof damage after a storm, citing owner neglect in not replacing an old roof.

In effect, the insurer is citing maintenance neglect as a hazard.

Hazard

Before deciding to provide coverage, an insurer may consider the particular hazards that make one candidate riskier than most others. A hazard may be any action, condition, habit, circumstance, or situation that makes a peril more likely to occur or a loss more likely to be suffered as the result of a peril.

The insurance industry commonly divides hazards into three categories: physical, moral, and morale.

Physical Hazards

Physical hazards are actions, behaviors, or conditions that cause or contribute to peril. Smoking is considered a physical hazard because it increases the chance of a fire occurring. It also is considered a physical hazard in regard to health insurance because it increases the probability of severe illness.

Frayed electrical wiring or liquid spills are physical hazards, as are a number of activities, such as working at high altitudes and operating heavy equipment.

Moral Hazards

Moral hazards are wrongful behavior or conduct.

Health insurance companies are concerned with moral hazards that lead to fraudulent claims, such as auto accident victims who invent or exaggerate their injuries.

The insurance industry itself may be a morale hazard. Having insurance may make people less careful about avoiding injury or illness since they have insurance to cover the costs.

A business owner who ignores health and safety concerns in the workplace has created a moral hazard. Failing to properly maintain business structures is a moral hazard.

Morale Hazards

Morale hazards are careless or reckless attitudes that can cause peril.

It has been speculated that the insurance industry itself causes a morale hazard. That is, an individual who is covered by insurance might be less likely to safeguard health or property than one who will lose everything if a disaster occurs.

Even the legal system is sometimes considered a morale hazard as it may encourage people to sue for monetary gain even when they have little or no cause.

What is considered to be any situation that has the potential for loss?

What is the definition of chance of loss?

Which of the following types of risks carry a chance of either loss or gain?