When a person who has agreed to meet an obligation might fail to do so and such failure
would produce financial loss, risk exists.
Examples of risks in this category include failure of a contractor to complete a
construction project as scheduled, or failure of debtors to make payments as expected.
The Burden of Risk:
Some losses will occur
The cost of accumulated reserves
Deterrent effect on capital accumulation
Higher cost of capital
Feeling of frustration and mental unrest
Increasing Variety of Risks:
The earliest risks were exposure to the ravages of nature and predators.
Advances in technology produced new risks:
Risks of the Modern Environment:
Many risks facing individuals and organizations today were unknown a generation ago.
Liability for environmental damage, discrimination in employment, sexual
harassment, and violence in the workplace.
Hazards of the nuclear age
Terrorism — bombings
Risks related to information technology - Cyber
Increasing Severity of Losses:
Although earthquakes, floods, and storms occur at about the same rate as in the past,
each new catastrophe seems to exceed previous losses.
There is simply more wealth, more assets and more investment exposed to loss.
As business has become more capital intensive, capital investment increases and
with it, the risk of financial loss.
Know the difference between Frequency and Severity
Frequency refers to the number of claims that an insurer expects to see. High
frequency means that a large number of claims is expected to come in.
Severity refers to the cost of a claim, with high severity claims being more
expensive than average estimates and low severity claims being less expensive
than the average.