Risk Management Terms and Definitions

Risk Management

Risk Management is the process of identifying, measuring, and treating exposures to potential loss.

Key Terms 

Understanding the key terms is vital to the understanding of risk management.

Risk 

Risk is the uncertainty of financial loss.  The term is used to designate the insured or a peril insured against.  Example:  Because we live, we are at risk of dying.  A pure risk is where there is no possibility of gain, only a loss or no loss.  Insurance is considered a pure risk purchase.  A speculative risk allows possible gains or losses.

Exposure 

Exposure is the possibility of loss.  There are three types of exposures:  property, liability and personal.  This book deals only with personal exposures.

Peril 

Peril is a cause of loss, such as an accident or an illness that causes death or disability.  (Sometimes called a hazard)

Loss 

A risk manager involved in planning the proper type and amount of insurance must consider the probabilities of loss in health, life and employment.

Methods of Handling Risk

Avoidance 

Avoiding a risk altogether, as when parents decide not to purchase an automobile for a college student.  A party could also avoid a risk by signing a hold harmless agreement.

Retention 

Retaining some of the risk as in having a deductible and/or coinsurance

Sharing 

Sharing the risk; Example:  A sole owner of a company takes on an equal partner.

Reduction 

Reducing risk; Example:  A company might have an exercise program for workers and reduce the risk of heart attacks.

Transfer 

Transferring the risk to another party as in the purchase of insurance.  In purchasing life insurance, the risk of economic loss by premature death is transferred to the insurance company.