CHAPTER 1RISK AND UNCERTAINTY IN HUMAN

• Concept of Risk• Type of Risk• Method of Handling Risk• Risk Management• Risk in the perspective of Islam

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Introduction

• What is Risk?

Vaughan and Vaughan (2003)

a condition in which there is a possibility of adverse deviation from a desired outcome that is expected or hoped for.

trieschman, Hoyt and Sommer (2005)

risk is uncertainty, create both problem and opportunities for the businesses and individuals in nearly every walk of life.

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• Risk is uncertainty about the future outcome of an event.

• Traditionally, risk means possibility of harm, injury or loss. it's describe the situation where there is uncertainty about what will be the outcome.

• Eg: risk would be of being diagnosed with lung cancer among smokers as there will always be an uncertainty as to whether a smoker will suffer from cancer or otherwise.

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Concept of Risk

• The level of risk determined by the relationship between frequency and severity.

• This relation is explained by the Heinrich Triangle where there is a high frequency the severity will be low and when the low frequency, the severity will be high

• Eg: A plane crash happens very seldom but when it takes place the severity will be high.

Peril & HazardTerm Description Example

PerilReferred to as the main cause of a loss

Fire, flood, collision, accident, earthquakes and sickness.

HazardRefer to the condition that increase the chance of loss

Physical HazardRefer to the physical condition of the subject matter that increases the chance of loss.

Defective wiring in a building that increases the chance of fire

Moral HazardRefer to the attitude of an individual that increases the chance of loss.

Internationally burning unsold merchandise that is insured to collect from an insurer or a dishonest insured who exaggerates the claim amount.

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Categories of RiskRisk Description Example

Pure Possibilities that can result in only a loss or breakeven (no loss). Pure risks can generally be covered

Fire, lightning, flood, storm, accident, theft etc

Speculative Possibilities that can result in loss, no loss or profit (gain). Speculative risks generally cannot be covered.

Investment in the stock market, foreign currency fluctuations, venturing into a new business.

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Personal Risk• Directly effect individual• It will lead to the possibilities of loss or reduction of

income, extra expenses incurred and depletion of assets.

• Types of personal risk Risk of premature death Risk of insufficient income during retirement Risk of poor health Risk of unemployment

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Property Risk• The possibility of loss due to damage a property caused by

fire, earthquakes and other natural disaster

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Property Risk

Description Example

Direct Loss Financial loss that results from the physical damage, destruction or theft

A factory damaged due to fire. The physical damage to the factory is a direct loss.

Indirect loss Financial loss that results indirectly from the occurrence of a direct physical damage of theft

The physical damage to the factory, the owner would lose his income due to reduction in turnover whilst the factory is being repaired. This will cause loss of income and would be a consequential loss.

Liability Risk

• Risk of third party bodily injured or property damage.

• In this case the court may order you to pay substantial damages to the person you have injured

• Eg – Business firms can be held legally liable for detective products that could cause bodily injury or property damage to consumers who use these product.

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Method of handling Risk

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