Agenda • Definitions of Risk • Chance of Loss • Peril and Hazard • Classification of Risk • Major Personal Risks and Commercial Risks • Burden of Risk on Society • Techniques for Managing Risk Definitions of Risk • Traditional Definition of risk: – Risk is defined as uncertainty concerning the occurrence of a loss – In the insurance industry, risk is also used to identify the property or life that is being considered for insurance
Chapter Risk and Its Treatment Agenda • Definitions of Risk • Chance of Loss • Peril and Hazard • Classification of Risk • Major Personal Risks and Commercial Risks • Burden of Risk on Society • Techniques for Managing Risk Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved Definitions of Risk • Traditional Definition of risk: – Risk is defined as uncertainty concerning the occurrence of a loss – In the insurance industry, risk is also used to identify the property or life that is being considered for insurance Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved Definitions of Risk (cont.) • Risk Distinguished from Uncertainty: – The term risk is used in situations where the probabilities of possible outcomes are known – Uncertainty is used in situations where such probabilities cannot be estimated Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved Definitions of Risk (cont.) • Loss Exposure: – Any situation or circumstance in which a loss is possible, regardless of whether a loss occurs Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved Definitions of Risk (cont.) • Objective risk – It is defined as the relative variation of actual loss from expected loss – It can be statistically calculated by some measure of dispersion, such as the standard deviation • Subjective (perceived) risk – It is defined as uncertainty based on a person’s mental condition or state of mind Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved Agenda • Definitions of Risk • Chance of Loss • Peril and Hazard • Classification of Risk • Major Personal Risks and Commercial Risks • Burden of Risk on Society • Techniques for Managing Risk Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved Chance of Loss • Chance of Loss: – The probability that an event will occur Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved Chance of Loss (cont.) • Objective Probability – It refers to the long-run relative frequency of an event based on the assumptions of an infinite number of observations and of no change in the underlying conditions • Subjective Probability – It is the individual’s personal estimate of the chance of loss Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved Chance of Loss vs Objective Risk • Chance of loss is the • Objective risk is the probability that an relative variation of event that causes a actual loss from loss will occur expected loss Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved General Average (cont.) ▪ (3) Characteristics (cont.) – It is necessary to emphasize that whatever measures are taken by way of sacrifice and/or expenditure, they must be successful General Average (cont.) ▪ (4) General Average Act – There is a general average act when, and only when, any extraordinary sacrifice or expenditure is intentionally made or incurred for the common safety for the purpose of preserving from peril to the property involved in a common marine adventure General Average (cont.) ▪ (5) Categories of General Average – There are two categories of general average: • (i) General average sacrifices, and • (ii) General average expenditures General Average (cont.) ▪ (5) Categories of General Average (cont.) • (i) General Average Sacrifices – The deliberate and reasonable sacrifice of part of a vessel or cargo for the purpose of achieving safety when the voyage is imperiled General Average (cont.) ▪ (5) Categories of General Average (cont.) • (ii) General Average Expenditures – Expense incurred, usually by the shipowner, for the joint benefit of the vessel and cargo interests as the consequence of a general average act General Average (cont.) ▪ (6) Essentials of General Average • (i) Extraordinary sacrifice expenditure • (ii) Voluntary • (iii) Reasonable, and • (iv) Imperilled in the common adventure General Average (cont.) ▪ (6) Essentials of General Average (cont.) • (i) Extraordinary sacrifice expenditure – The term “extraordinary” excludes any sacrifice or expenditure of a lesser degree, e.g “ordinary” General Average (cont.) ▪ (6) Essentials of General Average (cont.) • (ii) Voluntary – The loss must be “voluntary”, i.e it must be intentionally made General Average (cont.) ▪ (6) Essentials of General Average (cont.) • (iii) Reasonable – Nevertheless, any sacrifice must be prudently made and any expenditure incurred must be fair and reasonable and not excessive General Average (cont.) • (6) Essentials of General Average (cont.) • (iv) Imperilled in the common adventure – This summarises the wording used in the definition for the common safety for the purpose of preserving from peril the property involved in a common marine adventure – Certainly the peril must be real and threaten the whole adventure General Average (cont.) ▪ (7) Distribution of General Average Losses – In a marine adventure there must be two and possibly three basic interests They are: • The ship and its appurtenances • The cargo, and • The freight General Average (cont.) ▪ (7) Distribution of General Average Losses (cont.) – General average is proportionally distributed based upon the value of a portion of loss in a general average act and the saved value at the time and place of the ship's end of adventure immediately after such general average occurs General Average (cont.) ▪ (8) York-Antwerp Rules – International provisions that govern the adjustment of general average – These Rules not have the force of law but are voluntarily included by reference in contracts of ocean carriage between shipowners and cargo interest General Average (cont.) ▪ (8) York-Antwerp Rules (cont.) – These Rules are incorporated by reference into contract of carriage which usually provide that general average shall be adjusted in accordance with the rules of the country where the voyage ends Thank You!