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Chapter 1: Introduction to Risk Management

Pure risk
a chance of loss or no loss, but no chance of gain (risk associated with possible fire loss; building will either burn or not burn; may suffer financial loss or may remain unchanged)
Speculative risk
a chance of loss, no loss, or gain (may be profitable or unprofitable)
Price risk
uncertainty over the size of cash flows resulting from possible changes in the cost of raw materials and other inputs, as well as cost related changes in the market for completed products and other outputs
Credit risk
the risk that customers or other creditors will fail to make promised payments as they come due
Subjective risk
the perceived amount of risk based on an individual’s or organization’s opinion
Objective risk
the measurable variation in uncertain outcomes based on facts and data
Diversifiable risk
a risk that affects only some individuals, businesses, or small groups
Nondiversifiable risk
a risk that affects a large segment of society at the same time (unemployment, inflation, natural disasters)
Systemic risk
the potential for a major disruption in the function of an entire market or financial system; generally nondiversifiable
Static risk
risk that is always present for an organization (potential loss from natural disasters, fire theft, employee injury); different types of organizations will have their own static risks in addition to those that are common to all organizations
Dynamic risk
results from economic change and emerging risks
Hazard
a condition that increases the frequency or severity of a loss
Moral hazard
a condition that increases the likelihood that a person will intentionally cause or exaggerate a loss
Morale hazard
a condition of carelessness or indifference that increases the frequency or severity of a loss
Frequency
number of losses
Severity
the size of a loss
Physical hazard
a condition of property, persons, or operations that tends to increase the frequency or severity of a loss
Legal hazard
a condition of the legal environment that increases loss frequency or severity

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