CHAPTER 9 risk management.docx

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21 Apr 2012
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CHAPTER 9 risk management
DEFINING RISK
Speculative risk: loss and gain, but in uncertain amounts
o Risks that you choose to accept, rather than those that you encounter simply because of your
circumstances
Pure risk: possibility of loss only
o Risks that happen to us without having made a conscious choice to seek them out
THE RISK MANAGEMENT PROCESS
Step 1: Identify the risks
o Group risk into three general categories: personal or life and health; property; and liability to
other persons for our actions that affect them
o Torts: legal wrongs or injuries one person causes another
Common law is the part of the law determined by court decision over a long period of
time, rather than by statute
Limited liability (for limited corporations) means investors are not responsible beyond
the amount of money paid for the investment
Unlimited liability (for unincorporated businesses) are personally liable without limit for
all losses they cause
STAGE IN LIFE CYCLE
RISK
POSSIBLE LOSSES
LIFE AND
HEALTH
All stages
1-6
2-5
2-5, 7
Child
Disability
Disability
Death
Death
Disability
Extra expenses, family duties
Income (limited time or permanent)
Income
Extra expenses, family duties
Extra expenses
PROPERTY
Rental residence
Owned residence
Automobile
Other assets
Damage or destruction
Damage or destruction
Theft, damage or destruction
Theft, damage or destruction
Cost of finding other accommodations,
including hotel bills
Repair or replacement, cost of temporary
accommodations
Repair or replacement, cost of temporary
replacement rental
Repair or replacement, additional expenses
while waiting
LIABILITY
TO
OTHERS
Unincorporated
business
Property
Liability to second, third party
Liability to third party
Amount lost by other parties, legal costs
Amount lost by third party, legal costs
Step 2: Evaluating the risks
o Evaluate risk using two criteria: size of the potential loss, and the frequency or probability of
occurrence (neither are precisely defined)
o Basic rule is that a risk is insupportable if it materially affects the family’s standard of living
SIZE OF LOSS /
PROBABILITY OF OCCURANCE
HIGH
LOW
LARGE
Insupportable
Insupportable
SMALL
Supportable
Immaterial
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