Compare And Contrast Fundamental Risk and Particular Risk

1) Compare and contrast Fundamental risk and Particular risk by giving an example Fundamental risks affect the entire economy or a large number of people or groups within the economy. Fundamental risks include high inflation, unemployment, war, and natural disasters such as earthquakes, hurricanes, tornadoes, and floods. Particular risks are those that affect only individuals rather than the entire community. Burglary, theft, auto accidents, and house fires are all examples of specific risks. Individuals suffer losses in the face of specific risks, while the rest of the community is unaffected. The distinction between a fundamental and a particular risk is critical, because government assistance may be required to ensure a fundamental risk. Unemployment, for example, is not generally insurable by private insurance companies but can be insured publicly by federal or state agencies. 2) Explain the following risk management techniques and give one example of each: a) Risk Avoidance = risk is proactively avoided after rational consideration and the possibility of loss is zero. For instance, a manufacturer may stop the production of a defective product to avoid a lawsuit. b) Risk Retention = The company will bear the consequences of the loss. When the impact and consequences of the risk or loss are not too severe, the risk or loss is normally assumed or retained. The ability to assume risk in an organization is determined by one's financial capability. c) Risk Transfer and Risk Sharing = Risk transfer entails delegating responsibility for dealing with a risk event and its consequences to a third party. Only threats are covered by the risk transfer strategy. Risk-sharing entails collaborating with another party to increase the likelihood of a risky event occurring. An example of risk transfer is purchasing insurance for any unforeseen events. d) Loss Prevention and Loss Reduction= loss prevention is reducing the number of losses (Frequency) imposed by law or by the government and businesses. For instance, at the workplace, you should wear appropriate attire. Next, loss reduction reduces or mitigates the impact of losses (Severity). It can be used in two (2) situations: before and after a loss. For example, before a loss, install a fire alarm, water sprinklers, fire extinguishers, and so on. e) Separation= Instead of confining the firm's assets to a single major area, it disperses them across several locations. This measure will mitigate the impact of losses in the event of a major disaster. For example, in the automobile industry, the separation of headquarters and the assembly plant. 2) Distinguished between business risk and market risk Business risk is the exposure to economic value uncertainty that cannot be marked to market. The distinction between market risk and business risk is analogous to the distinction between market-value and book-value accounting. 4) Risk can be segregated into systematic and non-systematic. Distinguished between these two by giving an example Systematic risk is also known as non-diversifiable risk or market risk. Systematic risk refers to fluctuations in the returns on securities caused by macroeconomic factors. Systematic risk can be caused due to unfavorable reasons such as an act of nature like a natural disaster. Non-systematic risk, also known as diversifiable risk, refers to fluctuations in a company's returns caused by macroeconomic factors. These risk factors exist within the organization and can be avoided if the necessary steps are taken. Producing undesirable products is one of the risk factors. 5) There are 2 factors that the company has to consider before implementing a risk management program. Explain the factors There are 2 factors which are financial criteria and non-financial criteria. Financial criteria are whether it will affect the organization’s profitability or rate of return and nonfinancial criteria, it is whether it affects the growth of the organization, humanitarian aspects, and legal requirements. 6) Explain 3 types of hazards There are 3 types of hazards which are physical, moral, and morale. Physical hazard is a condition that increases the chance of loss and it relates to the tangible aspects of risks that are likely to influence the occurrence and severity of a loss. For instance, the location of the property. Next, is moral hazard. This hazard is a character defect in an individual that increases the chance of loss. Results from the dishonest tendencies in the character of the insured person. An example of a moral hazard is exaggerating the claim. Lastly, morale hazard. An attitudinal defect in an individual that increases the chance of loss with the knowledge that insurance exists. is an act to increase losses where insurance exists, not necessarily because of dishonesty but because of a different attitude toward losses that will be paid by insurance. For instance, failure in safeguarding own property.