1. Some terminology
(Chapter 1)

2. Risk The definition of risk varies between finance and insurance
Finance: Risk = dispersion of returns (Standard deviation of returns)
Insurance: Condition of possible adverse outcomes
Adverse deviation from a desired or expected outcome

3. Degree of risk More risk and less risk
Higher/lower probability of loss
Higher/lower level of loss
Frequency and severity
Contrast with finance (Is near certain death high risk or low risk?)

4. Perils and Hazards A peril is a cause of loss
Examples: Fire, collision
Excluded perils, multiple perils
Hazard: Condition that aggravates the chance of loss or its severity
Example: Fog

5. Types of hazards
Physical
Moral
Morale
Legal

6. Moral and morale hazards
There could be outright dishonesty in making claims (feigned back problems)
Or it could be a case of change in attitude or behavior after the insurance is purchased (morale hazard)
Legal: Liability laws could change adversely after the policy has been sold (asbestos, cigarettes)

7. Classifications of risk
Fundamental and particular()
Pure() and speculative
Financial () and non-financial
Static () and dynamic
indicates the type risk suited for insurance contracts

8. Types of pure risks Personal (life and health)
mortality, longevity, disability, sickness, unemployment
Property (loss of property, loss of use)
Liability
Performance failure of others (debtors, contractors, employees

9. The burden of risk Need to have reserve funds
Reduced incentive to engage in certain productive activities
Reduced incentive for capital investment
Difficulty in making long term plans

10. Dealing with risk Insurance is not the only way Contracts
Loss reduction/prevention efforts
Reserve funds