THE RISK

P R E S E N T E D B Y: R U K M A N I
KHADKA
 Introduction
The risk is a concept which relates to human expectations and denotes a potential negative impact on an
asset or some characteristic of value that may arise from some present process or some future event.

In insurance terms, risk is the chance something harmful or unexpected could happen and this might
involve the loss, theft, or damage of valuable property and belongings, or it may involve someone being
injured.

The risk is considered as the raw material of insurance, so it is very important to be aware on the
concept of risk in insurance law.

These risks may injure individual personally (i.e. Premature death – disability – disease ----etc.) , injure
his property (i.e. Collision risk for his car – fire risk for his house … etc.) or injure his liabilities toward
others (i.e. Liabilities risks for owners' cars and owners' ships and owners' airplanes …. etc.).
Risk in simple term can be defined as the inability to predict the occurrence of loss.

Insurance protects against risk, in the sense that people who buy insurance are financially compensated in case of
loss.

 Purchasing insurance does not remove risk but merely provides compensation for the loss and spreads the cost of
sharing the risk.

REJDA has defined risk "Uncertainty concerning the occurrence of a loss" .

WILLIAMS, HEAD, HORN & GLENDENNING have defined risk “The possibility of loss”.

 Hence, the risk may be defined as "Uncertainty as to an event that it results in financial loss, and it can be
measured quantitative"
 PURE RISK VS. SPECULATIVE RISK

DUE TO CHANCE

DEFINE AND MEASURABLE LOSS

Elements of Risk STATISTICALLY PREDICTABLE

NON-CATASTROPHIC

LARGE NUMBERS OF EXPOSURE UNITS

PREMIUM SHOULD BE ECONOMICALLY

FEASIBLE.
 Pure risks mean the situations that result only in loss or no loss which
includes any uncertain situation where the opportunity for loss is present
and the opportunity for financial gain is absent.

Insurance companies normally only indemnify against pure risks,

otherwise known as event risks.
Pure Risk vs. The examples for pure risks is ownership of property for example

Speculative ownership of a house will have a fire or it will not. Also ownership a car
will be stolen, or it will not be.
Risk Speculative risks are those that might produce a profit or loss, namely
business ventures or gambling transactions.

 One of the example is the investment made by a person in stock of

exchange may be lost if the prices of shares and bounds had decreased,
but this risk is born in return for the possibility of profit (i.e. if the prices
had risen).  

Speculative risks lack the core elements of insurability and are almost
never insured.
 An insurable risk must have the prospect of accidental loss,
meaning that the loss must be the result of an unintended action and
must be unexpected in its exact timing and impact.

Due to The insurance industry normally refers to this as "due to chance." 

Chance Insurers only pay out claims for loss events brought about through
accidental means, though this definition may vary from state to state.

It protects against intentional acts of loss, such as a landlord

burning down his or her own building.
 One of the requirement is that the loss should be both
determinable and measurable which means the loss should be
definite as to cause, time, place, and amount.

Define and Life insurance in most cases meets this requirement easily as the
cause and time of death can be readily determined in most cases, and
Measurable if the person is insured, the face amount of the life insurance policy

loss is the amount paid.

Without this information, an insurance company can neither

produce a reasonable benefit amount or premium cost.
 Insurance is a game of statistics, and insurance providers must be
able to estimate how often a loss might occur and the severity of the
loss.
Statistically Losses that occur more frequently or have a higher required benefit

predictable normally have a higher premium. 

Life and health insurance providers, for example, rely on actuarial

science and mortality and morbidity tables to project losses across
populations.
 Standard insurance does not guard against catastrophic perils. 

For an insurance company, catastrophic risk is simply any severe loss

deemed too expensive, pervasive or unpredictable for the insurance
company to reasonably cover.

There are two kinds of catastrophic risk. The first is present whenever
all or many units within a risk group, such as the policyholders in that
class of insurance, are all be exposed to the same event. Examples of
Non- this kind of catastrophic risk include nuclear fallout, hurricanes or

Catastrophic earthquakes.

The second kind of catastrophic risk involves any unpredictably large

loss of value not anticipated by either the insurer or the policyholder.
Perhaps the most infamous example of this kind of catastrophic event
occurred during the terrorist attacks on Sept. 11, 2001.

Some insurance companies specialize in catastrophic insurance, and

many insurance companies enter into reinsurance agreements to guard
against catastrophic events.
 The theory of insurance is based on the law of large numbers.

Large Numbers Therefore the prime necessity for a risk to be insurable is that there
must be a sufficiently large number of homogeneous exposures in
of Exposure order to combine losses that are reasonably predictable.

Units Lost data can be compiled over time, and losses for the group as a
whole can be predicted with some accuracy.

The probabilistic estimates used by the insurance company, by

logic, assume a large number of units in a distribution and insurance
products are priced accordingly.
 It is the final requirement that the premium should be economically
feasible. The insured must be able to pay the premium.

Premium In addition, for the insurance to be an attractive purchase, the

should be premiums paid must be substantially less than the face value, or
amount, of the policy.
economically Since the insurance pool is structured to be sufficiently large, the
feasible price charged by the insurer for buying the risk is generally low. It
should be sufficient to cause the rich for the insurer as well as viable
for the insured.
 Purpose of Selection of Risk
The first and the foremost purpose of the selection of risk are to determine whether the proposal
should be accepted or not.

The second objective of the selection is to determine the rate of premium to be charged from the
assured. The premium depends upon the amount of risk. Higher is the risk the more will be amount of
premium. Each and every proposal should be evaluated to determine the amount of risk for calculation
of premium. The evaluation of risk is also known as the selection of risk.

There are various degrees of risk to a person and so theoretically at least, all the persons should be
charged different premiums, but it is not practicable to charge so many premiums as many applicants
are. Therefore for practical purpose the risks are classified, and premiums are determined accordingly.
The selection of risk is also essential to avoid adverse-selection: Selection of risk is very
essential to check the anti-selection or adverse-selection which means selection of the persons for
insurance who are not insurable and charging of lesser premium for those who are to be charged
higher premium.

It is to avoid any discrimination on the part of the live assured. Since the degree of risk is not
the same to all persons , different premium should be charged for different groups.
Commencement of Risk

Commencement of risk in insurance parlance means the actual date/time at

which any risk is transferred to insurer from an individual or business entity
(called insured).

It is the exact moment at which insurer has potential liability and buyer of
insurance policy is absolved from potential losses or liabilities. 
The first step of buying any life insurance policy is to assess one’s insurance requirements.

The second part of buying an insurance policy is to fill up a proposal form, which asks for
personal details, income details and health-related details and this proposal form along with the
first-year premium is then sent to the insurer.

Depending upon the information you have given, the insurer then assesses your case and This
process, in insurance parlance, is called underwriting.

For instance, if your income is not in sync with the amount of cover you have asked for or your
medical health puts you at higher risk, the insurer will get back to you for a review or for further
medical tests.
Only after the insurer decides to insure you does a policy bond get prepared and it is from this point
that a cover becomes active. This is also called the date of commencement of the risk.

 Some insurers communicate this date through email or SMS even before the policy bond reaches you
by post and some insurers also let you choose the date of commencement of risk.
 Attachment of Risk
Attachment of risk is the commencement of liability under a contract of insurance to answer for any
loss or damage that may result from a risk insured against.

The loss or damage should be during the term of the insurance in an amount not exceeding the
amount stipulated in the contract.
 Duration
The policy remains in force , in the ordinary course of events ,until the expiration of the period of the
insurance.

The policy may cease before expire period due to the following reasons:

i. By payment of the full sum insured under the policy.

ii. By consent of the parties.

iii. Under statute

iv. By breach of condition .

 The alteration of risk under policy
The risk that the event insured against will or will not happen necessarily depends on the subject
matter of insurance and its attended circumstances , and the insurers , in accepting insurance , are
guided by the state of subject matter and the circumstances existing at the date of the policy.

The description inserted in the policy of the subject matter and its circumstances, therefore, serves to
define the risk undertaken by the insurers , and any alteration made during the currency of the policy
which affect the subject matter as so described as an alteration of risk since the statement of facts
contemplated by the insurers no longer exists in its entirely.

There will be no alteration of risk where the alteration does not affect the description in the policy.
Alteration of risk fall into three different classes:

Alteration into the subject matter of insurance.

Changes of locality.

Changes of circumstances.
The effect of an alteration

WHERE THE POLICY CEASES TO WHERE THE ALTERATION MERELY

APPLY SUSPENDS THE OPERATION OF
THE POLICY
Implied conditions as to make alterations

Where the policy contains an express Where there is no express condition

conditions against alterations. alterations
Express conditions as to make alterations

CONDITIONS PROHIBITING CONDITIONS PROHIBITING TIME FOR GIVING NOTICE.

INCREASE OF RISK. ALTERATIONS WITHOUT
NOTICE.
Duty of the Assured
If the assured becomes aware that an alteration of the risk will take place or has taken place, he shall,
without undue delay, notify the insurer.

If the assured, without justifiable reason, fails to do so, the rule shall apply, even if the alteration was
not caused by him or took place without his consent, and the insurer may cancel the insurance by
giving fourteen days' notice.
 Don't risk more
than you can
afford to lose:

Rules of Risk
Don't risk a lot Consider the
for a little. odds.
Don’t risk more than you can afford to lose

This is a measure of severity.

If the maximum possible loss could not be paid out of ready reserves without necessitating
borrowing, or if such a loss might actually lead to bankruptcy, an alternative method of handling the
risk needs to be considered (insurance, non-insurance transfer, etc.).

This rule is a measure of loss bearing capacity which varies by entity and individual.
 Consider the odds.
Events unlikely to occur may not necessitate consideration (unless the severity of such an event is
greater than the loss bearing capacity); whereas events with a greater probability of occurrence need to
be managed.

The greater the likelihood of an event, the higher the cost to insure the loss that results; alternative
risk management techniques will need to be used in high frequency loss situations.

Insurance premiums are based on the statistical odds of an occurrence.

 Don’t risk a lot for a little

After weighing the cost of insurance compared to the potential out-of-pocket expense, don't self-
insure a loss that could be transferred to the insurance carrier for a known, relatively small amount of
premium.

Such review of the insurance premium may, and usually does, lead to insuring losses less than a
particular person's or entity's individual loss bearing capacity. 

This rule and the insurance decision to which it leads is a function of the two previous rules.
Thank you !!!!