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Archive for March, 2015|Monthly archive page

Multiple Interpretation of Risk and Uncertainty

In Uncategorized on March 5, 2015 at 3:28 pm

Risk deals with syndrome of multiple interpretations and boundary less. Through this blog, I would like to clarify few terms associated with risk and uncertainty.  

Risk and loss: We usually relate risk with loss.  Loss is a common experience that can be encountered many times during a lifetime by losing someone or something or that result in disadvantage. A common difference between a loss and risk is former results only in negative consequence while risk may have positive or negative consequences though, people often forget benefits out of taking good risks.

Perils and Hazard:  Hazard arises from the material, operational, or occupational characteristics of an insured property. It is a substance for which there is valid evidence that it is combustible, compressed, and explosive or water (moisture) reactive. Though, a peril is something that can cause a loss. Examples include falling, crashing your car, fire and lightning while a hazard is any condition or situation that makes it more likely that a peril will occur.

A hazard may be Physical hazards, like smoking, or skydiving or Moral hazards (most of which are avoidable), like dishonesty for example burning down the stocks in the godown when your company goes bankrupt to collect insurance money or buying insurance on someone with yourself as beneficiary and then killing them or Morale hazards, like a careless attitude since “insurance will pay for it.” Simply put, hazards are the circumstances or source of potential damage whereas peril is a serious or immediate danger.

Insurance companies deals with small, medium and large risk of individuals and corporate. They use plethora of such terms very frequently which is often confused by many. A most classic example is “what is difference between risk and uncertainty”.  Insurance companies are happy to insure predictable risk which should not certainly happen.  

Interpretation 1:  Unpredictable risk cannot be insured. 

Interpretation 1: Unpredictable risk cannot be insured

Interpretation 2:  An uncertainty is insurable or not? For example natural disaster are predictable and unpredictable both – so, some are insured whereas all cannot be insured.

Interpretation 3: The risk which will certainly occur after a period of time or after an event, is also not insurable.

Interpretation 4: Risk has its own characteristics so do the loss.

Interpretation 5: Insurance is more dependent upon perils though, premium rate varies significantly on the basis of hazards.

There can be many more. Understanding of risk and uncertainty is highly debatable so do its measurability and immeasurability. A possible reason for multiple interpretation can be Risk viewed from multiple perspectives. This makes subject interesting however, it appears more complex if seen holistically.

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