By HANNAH ATOMODE
Risk is a perceived concept that varies from person to person. It can be seen as the possibility of a bad occurrence, doubt concerning an outcome, likelihood of loss, chances of gain, or unpredictability. When risks are identified, they must be measured to inform decision-making on risk management.
Risk means different things to different people. A business owner sees a risk as the possibility of going bankrupt. A parent may see risk as the likelihood of danger happening to their children, while a car owner may view damage to their property as a risk.
As risk is perceived in various ways, so also is risk managed based on individual risk assessment. Risk is the possibility of a bad occurrence. Doubt concerning an outcome of a situation can also be seen as risk, likelihood of loss, the chances of gain, and unpredictability are true definitions of risk. When risks are identified, there is a need for the risk to be measured, and this enhances our decision on how to manage such risk.
Individuals respond to risk differently. A risk-averse person avoids risks A risk-averse person is not willing to take a risk at all and does everything in their capacity to avoid them as much as possible. They are always willing to transfer the risk. While a risk-seeking person takes riskier options to maximize profits. Risk management involves various strategies, including risk transfer mechanisms like insurance. When a future potential risk is identified, there is a need for the risk to be transferred to an insurer.
Insurance is a risk transfer mechanism that provides peace of mind to the insured. It involves paying a premium to an insurer, who reimburses the insured in the event of a loss. Insurance can be seen as a pool where premiums are collected from multiple individuals to cover common perils.
While I was in school, insurance did not make any sense to me. How can you pay a small amount of money to get a lot of money when there is a total loss? I gained more understanding when I started working in the industry. Premiums are collected from lots of people for common perils, and some of these funds are invested for insurance to make profits, aside from the underwriting profit, which is what keeps them in business.
The insurance process involves three steps:
- Risk identification: discovering an existing or potential threat in the future. Identifying a risk helps you make a good decision, as some risks cannot be insured but can be managed. This also helps underwriters come up with ways to control some of the identified risks to mitigate the risk if they crystallise.
- Risk analysis: there is a need for past data to be analysed, as this helps the insurer put a value on the risk and charge an adequate premium to cover the loss.
- Risk control: when risks are identified, some action should be taken to control, reduce, or eliminate the risk. It can be physical control measures, financial control measures, or developing a good risk culture.
Insurable risks include:
1. Financial risks (e.g., accidental damage, theft, business interruption).
2. Pure risks with no possibility of gain.
3. Particular risks (e.g., factory fire, car collision damage).
Insurable risk characteristics:
1. The event insured must be unforeseen; it must be a loss that is uncertain.
2. There must be an insurable interest; you cannot insure your friend’s car.
3. It must not be against public policy; you cannot insure against criminal acts.
4. Homogeneous exposure: a sufficient number of exposures to similar risks.
•Hannah Atomode (ACIIN, YIPP) is a
business analyst and insurance underwriter. To learn more you can follow talkinsurancewithhannah on Instagram, Facebook, Tiktok and YouTube channel.
