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Insurance

Insurance

Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of potential financial loss. Insurance is defined as the equitable transfer of the risk of a potential loss, from one entity to another, in exchange for a reasonable fee and duty of care.

Principles of insurance

The timing or occurrence of the loss must be uncertain. The rate of losses must be relatively predictable: In order to set premiums (prices) insurers must be able to estimate them. If the coverage is unique, the insured will pay a correlatingly higher premium. Lloyd's of London often accepts unique coverages. (e.g. the insuring of Tina Turner's legs) The losses must be predictable on a macro level: Insurers need to know how much it would be required to pay when the insured event occurs. Most types of insurance have maximum levels of payouts, but not all do, notably health insurance. The loss must be significant: The legal principle of De minimis dictates that trivial matters are not covered. Furthermore, rational insurance uses existing insurance when the transaction costs dictate that filing a claim is not rational. The loss must not be catastrophic: If the insurer is insolvent, it will be unable to pay the insured. Note that, in the United States, there exists a little-known system of Guaranty Funds to reimburse insured people whose insurance companies have become insolvent. [http://www.ncigf.org] This program is run by the National Association of Insurance Commissioners (NAIC). [http://www.naic.org/]

Indemnification

An entity seeking to transfer risk (an individual, corporation, or association of any type) becomes the 'insured' party once risk is assumed by an 'insurer', the insuring party, by means of a contract, defined as an insurance 'policy'. This legal contract sets out terms and conditions specifying the amount of coverage (compensation) to be rendered to the insured, by the insurer upon assumption of risk, in the event of a loss, and all the specific perils covered against (indemnified), for the term of the contract. When insured parties experience a loss, for a specified peril, the coverage entitles the policyholder to make a 'claim' against the insurer for the amount of loss as specified by the policy contract. The fee paid by the insured to the insurer for assuming the risk is called the 'premium'. Insurance premiums from many clients are used to fund accounts set aside for later payment of claims - in theory for a relatively few claimants - and for overhead costs. So long as an insurer maintains adequate funds set aside for anticipated losses, the remaining margin becomes their profit.

Example: home insurance

For example, let us assume a home is purchased for $100,000. Knowing the loss of the home from a peril would cause significant financial loss, insurance coverage is ordinarily acquired in the form of a homeowner's policy. The insurance company charges the insured a premium, of perhaps $1,000 a year in this example, for assuming liability for the risk. At this point, the risk of loss has been transferred from the insured to the insurance company. In the event of a covered peril, the insurer pays the claimant the amount of loss according to the terms of the contract, in ordinary circumstances, which may amount to the cost of replacing or repairing the home.

How an insurance company makes money

A customer might pay one or more premium payments over time. The company collects these payments from one or more customers. If something happens which triggers a claim, the company then pays out a certain amount of money. If, during the lifetime of all of the company's insurance contracts, it pays out less than it has taken in, it makes what is known as an underwriting profit. One measure of an insurance company's performance is their loss ratio (incurred losses and loss-adjustment expenses divided by net earned premium). The loss ratio is added to the expense ratio (underwriting expenses divided net premium written) to determine the company's combined ratio. The combined ratio is a reflection of the company's overall underwriting profitability. A combined ratio of less than 100 percent indicates a profit, while anything over 100 is a loss. Two companies that are famous for achieving underwriter profit are American International Group and Berkshire Hathaway. In many cases a company's combined ratio is greater than 100 percent, however the company still manages to make money. This is because in between the time the company collects premiums and when it pays out claims, it can invest that money. The return from these investments can offset an underwriting loss resulting in profit. For example, if a company has to pay out 10 percent more than it took in, but made a 20 percent return on its investment, then it made a 10 percent profit. However, since most insurance companies consider it only prudent to invest in risk-free government bonds, or other lower risk and lower return forms of investments, it's important that the extra amount it has to pay out compared to what it has to take in is less than the percent return of these investments. If it isn't, the company loses money. The extra amount that a company has to pay out can be considered a "cost of funds" and be compared to an interest rate of the same company borrowing money. Because of this, most insurance companies don't have a goal just to have any amount of profit over the cost of funds, but rather to have this cost of funds to be lower than what they would have been able to get by borrowing somewhere else. If this isn't the case, the insurance company does not add any value to their owners, who theoretically could have borrowed money from somewhere else and made the same investments themselves.

Determination of rate structures

The insurer uses actuarial science to quantify the risk they are willing to assume. Data is generated to approximate future claims, ordinarily with reasonable accuracy. Actuarial science uses statistics and probability to analyze the risks associated with the range of perils covered, and these scientific principles are used by insurers, in conjunction with additional factors, to determine rate structures. For example, many individuals purchase homeowner's insurance policies by signing a contract paying a premium to an insurance company. If a covered loss occurs, the insurer is obliged by the terms of the contract to honor the insured's claim. For some policyholders, the amount of insurance benefits received from their insurer will greatly exceed the expense of premiums paid. Others may never make a claim or receive any benefit other than the peace of mind rendered by the security of an insurance policy. When averaged, the total claims expense paid by an insurer should be less than the total premiums paid by their policyholders, with the difference allocated to overhead and profit. Insurance companies also earn investment profits. These are generated by investing premiums received until they are needed to pay claims. This money is called the 'float'. The insurer may make profits or losses from the value change in the float as well as interest or dividend on the float. In the United States, the underwriting loss of property and casualty insurance companies was $142.3 billion in the five years ending 2003. But overall profit for the same period was $68.4 billion, at the result of float. Some insurance industry insiders, most notably Hank Greenberg, do not believe that it is forever possible to sustain a profit from float without an underwriting profit as well.

Gambling analogy

Some people erroneously consider insurance a type of wager (particularly as associated with moral hazard) that executes over the policy period. The insurance company bets that you or your property will not suffer a loss while you put money on the opposite outcome. The difference in the fees paid to the insurance company versus the amount for which they can be held liable if an accident happens is roughly analogous to the odds one might expect when betting on a racehorse (for example, 10 to 1). For this reason, a number of religious groups including the Amish and Muslims avoid insurance and instead depend on support provided by their communities when disasters strike. This can be thought of as "social insurance", as the risk of any given person is assumed collectively by the community who will all bear the cost of rebuilding. In closed, supportive communities where others will actually step in to rebuild lost property, this arrangement can work. Most societies could not effectively support this type of system and the system will not work for large risks. For very large risks, Western insurance can also run into difficulties. This is the reason why most homeowner's insurance does not cover floods. A company that sells homeowner's insurance in a given city can fairly accurately estimate how many fires, tornadoes, and so forth it can expect to pay out. However, a flood may impact a large percentage of the city and the company might be unable to deal with this. An example of this is what happened with Hurricane Katrina. However, since in gaming or gambling the game is supposed to be fixed at the start so that the odds are not supposed to be affected by no-game elements by the players. In fire insurance on the other hand, insurers require that policyholders do risk mitigation like installing sprinklers thereby reducing the odds of loss. In addition, after a loss, say disability, insurers specialize in providing rehabilitation to reduce the loss after it occurs. It is only when the odds of the bad outcome nor the severity of loss can be mitigated that insurance is not true insurance. That is when the existence of the fire policy entices a criminal into arson insurance is not truly insuring anything. The gambling analogy holds with insurance in terms of risk and reward. The difference is in the motivation behind the process. When gambling, you are assuming risk that you would not otherwise be exposed to that has the possibility of either a loss or a gain (speculative risk). With insurance, you are managing risk that you could not otherwise avoid, and which does not present the possibility of gain (pure risk). In other words, gambling is not an insurable risk.

History of insurance

Early methods of transferring or distributing risk were practiced by Babylonian traders as long ago as the 2nd millennium BCE. The Babylonians developed a system which was recorded in the famous Code of Hammurabi, c. 1750 BC and practiced by early Mediterranean sailing merchants. If a merchant received a loan to fund his shipment, he would pay the lender an additional sum in exchange for the lender's guarantee to cancel the loan should the shipment be stolen. A thousand years later, the inhabitants of Rhodes invented the concept of the 'general average'. Merchants whose goods were being shipped together would pay proportionally divided premium which would be used to reimburse any merchant whose goods were jettisoned during storm or sinkage. The Greeks and Romans introduced the origins of health and life insurance c. 600 AD when they organized guilds called "benevolent societies" which acted to care for the families and funeral expenses of members upon death. Guilds in the Middle Ages served a similar purpose. The Talmud deals with several aspects of insuring goods. Insurance became far more sophisticated in post-Renaissance Europe, and specialized varieties developed. Toward the end of the seventeenth century, the growing importance of London as a centre for trade led to rising demand for marine insurance. In the late 1680s, Mr Edward Lloyd opened a coffee house which became a popular haunt of ship owners, merchants and ships’ captains, and thereby a reliable source of the latest shipping news. It became the meeting place for parties wishing to insure cargoes and ships, and those willing to underwrite such ventures. Today, Lloyds of London remains the leading market for marine and other specialist types of insurance, but it works rather differently to the more familiar kinds of insurance. (See Lloyd's of London). Insurance as we know it today can be traced to the Great Fire of London, which in 1666 devoured 13,200 houses. In the aftermath of this disaster Nicholas Barbon opened an office to insure buildings. In 1680 he established England's first fire insurance company, "The Fire Office", to insure brick and frame homes. The first insurance company in the United States provided fire insurance and was formed in Charles Town (modern-day Charleston), South Carolina, in 1732. Benjamin Franklin helped to popularize and make standard the practice of insurance, particularly against fire in the form of perpetual insurance. In 1752, he founded the [http://www.contributionship.com/ Philadelphia Contributionship for the Insurance of Houses from Loss by Fire]. Franklin's company was the first to make contributions toward fire prevention. Not only did his company warn against certain fire hazards, it refused to insure certain buildings where the risk of fire was too great, such as all wooden houses. In the United States, regulation of the insurance industry is highly Balkanized, with primary responsibility assumed by individual State insurance departments. Whereas insurance markets have become centralized nationally and internationally, State insurance commissioners operate individually, though at times in concert through a national insurance commissioner's organization. In recent years, some have called for a federal regulatory system for insurance similar to that of the banking industry. In the State of New York, which has unique laws in keeping with its stature as a global business center, attorney general Eliot Spitzer has been in a unique position to grapple with major national insurance brokerages. Spitzer alleged that Marsh & McLennan steered business to insurance carriers based on the amount of contingent commissions that could be extracted from carriers, rather than basing decisions on whether carriers had the best deals for clients. Several of the largest commercial insurance brokerages have since stopped accepting contingent commissions and have adopted new business models.

Types of insurance

Any risk that can be quantified probably has a type of insurance to protect it. Among the different types of insurance are:
- Automobile insurance, also known as auto insurance, car insurance and in the UK as motor insurance, is probably the most common form of insurance and may cover both legal liability claims against the driver and loss of or damage to the vehicle itself. Over most of the United States purchasing an auto insurance policy is required to legally operate a motor vehicle on public roads. Recommendations for which policy limits should be used are specified in a number of books.
- Casualty insurance insures against accidents, not necessarily tied to any specific property.
- Credit insurance pays some or all of a loan back when certain things happen to the borrower such as unemployment, disability, or death.
- Financial loss insurance protects individuals and companies against various financial risks. For example, a business might purchase cover to protect it from loss of sales if a fire in a factory prevented it from carrying out its business for a time. Insurance might also cover failure of a creditor to pay money it owes to the insured. Fidelity bonds and surety bonds are included in this category.
- Health insurance covers medical bills incurred because of sickness or accidents.
- Liability insurance covers legal claims against the insured. For example, a homeowner's insurance policy provides the insured with protection in the event of a claim brought by someone who slips and falls on the property, and brings a lawsuit for her injuries. Similarly, a doctor may purchase liability insurance to cover any legal claims against him if his negligence (carelessness) in treating a patient caused the patient injury and/or monetary harm. The protection offered by a liability insurance policy is two-fold: a legal defense in the event of a lawsuit commenced against the policyholder, plus indemnification (payment on behalf of the insured) with respect to a settlement or court verdict.
- Life insurance provides a cash benefit to a decedent's family or other designated beneficiary, and may specifically provide for burial and other final expenses.
- Annuities provide a stream of payments and are generally classified as insurance because they are issued by insurance companies and regulated as insurance. Annuities and pensions that pay a benefit for life are sometimes regarded as insurance against the possibility that a retiree will outlive his or her financial resources. In that sense, they are the complement of life insurance.
- Total permanent disability insurance insurance provides benefits when a person is permanently disabled and can no longer work in their profession, often taken as an adjunct to life insurance.
- Locked Funds Insurance is a little known hybrid insurance policy jointly issued by governments and banks. It is used to protect public funds from tamper by unauthorised parties. In special cases, a government may authorise its use in protecting semi-private funds which are liable to tamper. Terms of this type of insurance are usually very strict. As such it is only used in extreme cases where maximum security of funds is required.
- Marine Insurance covers the loss or damage of goods at sea. Marine insurance typically compensates the owner of merchandise for losses sustained from fire, shipwreck, etc., but excludes losses that can be recovered from the carrier.
- Nuclear incident insurance - damages resulting from an incident involving radioactivive materials is generally arranged at the national level. (For the United States, see Price-Anderson Nuclear Industries Indemnity Act.)
- Political risk insurance can be taken out by businesses with operations in countries in which there is a risk that revolution or other political conditions will result in a loss.
- Professional Indemnity Insurance is normally a mandatory requirement for professional practitioners such as Architects, Lawyers, Doctors and Accountants to provide insurance cover against potential negligence claims. Non licensed professionals may also purchase malpractice insurance, it is commonly called Errors and Omissions Insurance and covers a service provider for claims made against them that arise out of the performance of specified professional services. For instance, a web site designer can obtain E&O insurance to cover them for certain claims made by third parties that arise out of negligent performance of web site development services.
- Property insurance provides protection against risks to property, such as fire, theft or weather damage. This includes specialized forms of insurance such as fire insurance, flood insurance, earthquake insurance, home insurance or boiler insurance.
- Terrorism insurance
- Title insurance provides a guarantee that title to real property is vested in the purchaser and/or mortgagee, free and clear of liens or encumbrances. It is usually issued in conjunction with a search of the public records done at the time of a real estate transaction.
- Travel insurance is an insurance cover taken by those who travel abroad, which covers certain losses such as medical expenses and theft.
- Workers' compensation insurance replaces all or part of a worker's wages lost and accompanying medical expense incurred due to a job-related injury. A single policy may cover risks in one or more of the above categories. For example, car insurance would typically cover both property risk (covering the risk of theft or damage to the car) and liability risk (covering legal claims from say, causing an accident). A homeowner's insurance policy in the US typically includes property insurance covering damage to the home and the owner's belongings, liability insurance covering certain legal claims against the owner, and even a small amount of health insurance for medical expenses of guests who are injured on the owner's property. Potential sources of risk that may give rise to claims are known as "perils". Examples of perils might be fire, theft, earthquake, hurricane and many other potential risks. An insurance policy will set out in details which perils are covered by the policy and which are not.

Types of insurance companies

Insurance companies may be classified as
- Life insurance companies, who sell life insurance, annuities and pensions products.
- Non-life or general insurance companies, who sell other types of insurance. In most countries, life and non-life insurers are subject to different regulations, tax and accounting rules. The main reason for the distinction between the two types of company is that life business is very long term in nature — coverage for life assurance or a pension can cover risks over many decades. By contrast, non-life insurance cover usually covers a shorter period, such as one year. Insurance companies are generally classified as either mutual or stock companies. This is more of a traditional distinction as true mutual companies are becoming rare. Mutual companies are owned by the policyholders, while stockholders, (who may or may not own policies) own stock insurance companies. Reinsurance companies are insurance companies that sell policies to other insurance companies, allowing them to reduce their risks and protect themselves from very large losses. The reinsurance market is dominated by a few very large companies, with huge reserves. Captive Insurance companies may be defined as limited purpose insurance companies established with the specific objective of financing risks emanating from their parent group or groups. This definition can sometimes be extended to include some of the risks of the parent company's customers. In short terms, it is an in-house self-insurance vehicle. Captives may take the form of a "pure" entity (which is a 100% a subsidiary of the self-insured parent company); of a "mutual" captive (which insures the collective risks of industry members) and of an "association" captive (which self-insures individual risks of the members of a professional, commercial or industrial association). Captives represent commercial, economic and tax advantages to their sponsors due to the reductions on costs they help create, the ease for insurance risk management and the flexibility for cash flows they generate. Additionally, they may provide coverage of risks which are neither available nor offered in the traditional insurance market at reasonable prices. The types of risk that a captive can underwrite for the parent include property damage, public and products liability, professional indemnity, employee benefits, employers liability, motor and medical aid expenses. The captive's exposure to such risks may be limited by the use of reinsurance. Captives are becoming an increasingly important component of the risk management and risk financing strategy of their parent. This can be understood against the following background:
- heavy and increasing premium costs in almost every line of coverage;
- difficulties in insuring certain types of fortuitous risk;
- differential coverage standards in various parts of the world;
- rating structures which reflect market trends rather than individual loss experience;
- insufficient credit for deductibles and/or loss control efforts. There are also companies known as 'insurance consultants'. Like a mortgage broker, these companies are paid a fee by the customer to shop around for the best insurance policy amongst many companies . Similar to an insurance consultant, an 'insurance broker' also shops around for the best insurance policy amongst many companies. However, with insurance brokers, the fee is usually paid in the form of commission from the insurer that is selected rather than directly from the client. Third Party Administrators are companies that perform underwriting and sometimes claims handling services for insurance companies. These companies often have special expertise that the insurance companies do not have.

Life insurance and saving

Certain life insurance contracts accumulate cash values, which may be taken by the insured if the policy is surrendered or which may be borrowed against. Some policies, such as annuities and endowment policies, are financial instruments to accumulate or liquidate wealth when it is needed. See life insurance. In many countries, such as the US and the UK, tax law provides that the interest on this cash value is not taxable under certain circumstances. This leads to widespread use of life insurance as a tax-efficient method of saving as well as protection in the event of early death.

Financial viability of insurance companies

Financial stability and strength of the insurance company should be a major consideration when purchasing an insurance contract. An insurance premium paid currently provides coverage for losses that might arise many years in the future. For that reason, the viability of the insurance carrier is very important. In recent years, a number of insurance companies have become insolvent, leaving their policyholders with no coverage (or coverage only from a government-backed insurance pool with less attractive payouts for losses). A number of independent rating agencies, such as Best's, provide information and rate the financial viability of insurance companies.

Controversies

Insurance insulates too much

By creating a "security blanket" for its insureds, an insurance company may inadvertently find that its insureds may not be as risk-averse as they should be (since the insured assumes the risk belongs to the insurer). This problem is known to the insurance industry as moral hazard. To reduce their own financial exposure, insurance companies have contractual clauses that mitigate their obligation to provide coverage if the insured engages in some kind of behavior that grossly magnifies their risk of loss or liability. For example, liability insurance providers do not provide coverage for liability arising from intentional torts committed by the insured. Even if a provider was irrational enough to try to provide such coverage, it is against the public policy of most countries to allow such insurance to exist, and thus it is usually illegal.

Complexity of insurance policy contracts

Insurance policies can be complex and some policyholders may not understand all the fees, regulation and coverages included in a policy. As a result, people could buy policies at unfavorable terms. In response to these issues, governments often make detailed regulations that set down minimum standards for policies and govern how they may be advertised and sold. Many individuals purchase policies through an insurance broker. The broker can counsel the policyholder on which coverage to purchase and limitations of the policy. A broker generally holds contracts with many insurers which allows the broker to "shop" the market for the best rates and coverage possible.

Redlining

Redlining is the practice of some insurance companies to deny the issuance of coverage in specific geographic areas, usually due to an increased likelihood of risk; the validity of the assessment may be real or perceived, though it is often attributed to discrimination. Evaluation of risk, when an insurer determines a premium or premium rate structure, considers quantifiable factors, including location, credit scores, gender, occupation, marital status, and education level. However, the use of these essential factors, whether inappropriately or not, are often considered to be 'unfair' or discriminatory by some consumers and their advocates, sometimes leading to political disputes about insurers' determination of premiums and possible government intervention to limit the factors used. A refutation to this is that the job of an insurance underwriter is to properly categorize a given risk as to the likelihood that the loss will occur. Any factor that causes a greater likelihood of loss should in theory, be charged a higher rate. This is a basic principle of insurance and must be followed for insurance companies or groups to operate properly, even for non-profit organizations. Thus, discrimination of potential insureds by legitimate factors is central to insurance. Therefore the only thing that can be considered legitimately "unfair" are practices that discriminate against a given group without actual factors that show that the group is a higher risk. So, eliminating real factors discriminates against other insureds by forcing them to bear part of the cost of the disallowed perceived factors.

Health insurance

Health insurance, which is coverage for individuals to protect them against medical costs, is a highly charged and political issue in the United States, which does not have socialized health coverage. In theory, the market for health insurance provision should function in a manner similar to other insurance coverages, but the skyrocketing cost of health coverage has disrupted markets around the globe, but perhaps most glaringly in the US. Please see health insurance for a discussion of this category.

Dental insurance

Dental insurance, like health insurance, is coverage for individuals to protect them against dental costs. Dental insurance usually goes hand-in-hand with health insurance, with most people in the United States receiving it included in their health insurance plan from their employer. Along with receiving dental insurance from your employer, there are ways to receive dental insurance through resellers and companies for individuals and families; although this way tends to be too expensive for most people.

Insurance Patents

New insurance products can now be protected from copying with a business method patent. This may lead to the more rapid introduction of new insurance products as insurance companies will invest more heavily in new product development if they can be reasonably assured that their patents will keep those products from being copied. A recent example of a new insurance product that is patented is telematic auto insurance. It was independently invented and patented by a major US auto insurance company, Progressive Auto Insurance ([http://www.freepatentsonline.com/5797134.html US patent 5,797,134]) and a Spanish independent inventor, Salvador Minguijon Perez ([http://v3.espacenet.com/origdoc?DB=EPODOC&IDX=EP0700009&F=8&RPN=EP0700009&DOC=cca34af1984f0dc47b32e9a9722ad1a148 European Patent EP0700009B1]). The basic idea of telematic auto insurance is that a driver's behavior is monitored directly while the person drives and this information is transmitted to an insurance company. The insurance company then assesses the risk of that driver having an accident and charges insurance premiums accordingly. A driver that drives a lot of distance at high speed, for example, will be charged a higher rate than a driver that drives small distances at low speed. A British auto insurance company, Norwich Union, has taken a license to both the Progressive patent and Perez patent. They have made additional investments in infrastructure to developed a commercial offering called "Pay As You Drive" or PAYD. Many independent inventors are in favor of patenting new insurance products since it gives them protection from big companies when they bring their new insurance products to market. Independent inventors account for 70% of the new US patent applications in this area. Many insurance executives are opposed to patenting insurance products because it creates a new risk for them. [The Hartford] insurance company, for example, had to recently pay US$80 million to an independent inventor, Bancorp Services, in order to settle a patent infringement and theft of trade secret lawsuit for a new type of corporate owned life insurance product invented and patented by Bancorp.

The insurance industry and rent seeking

Certain insurance products and practices have been described as rent seeking by critics. That is, insurance companies have been alleged to have certain products or practices that are only useful due to certain government laws (especially tax laws), and that the insurance industry in these cases generally adds no economic value but instead supports politicians who will continue the legal regime which gives the insurance company these benefits. For example, in the United States the current tax rules generally allow owners of variable annuities and variable life insurance to invest in the stock market and defer paying any taxes until withdrawals are made. Often this tax avoidance is the only benefit gained from purchasing these products instead of a mutual fund. Another example is the legal infrastructure which allows life insurance to be held in an irrevocable trust which is used to pay an estate tax while the proceeds itself are immune from the estate tax.

Glossary

- 'Combined Ratio' = loss ratio + expense ratio. Loss Ratio is calculated by dividing the amount of losses by the amount of written premium. Expense ratio is calculated by dividing the amount of operational expenses by the amount of earned premium. A lower number indicates a better return on the amount of capital placed at risk by an insurer.

Quote

- Hank Greenberg told his board of directors, "you can't even spell 'insurance'"[http://editor.slate.msn.com/default.aspx/id/2116167/nav/ais/] (hearsay, April 2005)

External links

- [http://www.iii.org/media/facts/statsbyissue/industry Insurance industry statistics in the U.S.]
- [http://www.insuranceonline.org.uk UK Insurance company reviews and links]
- [http://www.1click-insurance.co.uk/ Insurance directory for buying insurance in the UK]
- [http://www.eh.net/encyclopedia/?article=murphy.life.insurance.us Life Insurance in the United States through World War I]
- [http://www.encyclopedia.com/html/section/insuranc_TheHistoryofInsurance.asp Columbia Encyclopedia: The History of Insurance]
- [http://www.life-assurance-bureau.co.uk/faq-general/faq-home.htm Huge list of insurance based topics - also includes general finance]
- [http://www.insurance-owl.com Insurance information Centre]
- Category:Service industries ja:保険

Law

:This article is about law in society. For other possible meanings, see law (disambiguation). Law (a loanword from Old Norse lag), in politics and jurisprudence, is a set of rules or norms of conduct which mandate, proscribe or permit specified relationships among people and organizations, provide methods for ensuring the impartial treatment of such people, and provide punishments of/for those who do not follow the established rules of conduct. Law is typically administered through a system of courts, in which judges hear disputes between parties and apply a set of rules in order to provide an outcome that is just and fair. The manner in which law is administered is known as a legal system, which typically has developed through tradition in each country. Legal practitioners, most often, must be professionally trained in the law before they are permitted to advocate for a party in a court of law, draft legal documents, or give legal advice.

Legal traditions

There are generally four broad legal traditions that are practiced in the world today.

Civil law

The Civilian system of law is a codified law that sets out a comprehensive system of rules that are applied and interpreted by judges. It is by and large the most commonly practiced system of law in the world, with almost 60 % of the world's population living in a country ruled on the civilian system. The most important difference to common law is that normally, only legislative enactments are considered to be legally binding, but not precedent cases. However, as a practical matter, courts normally follow their previous decisions. Furthermore, in some civil law systems (e.g. in Germany), the writings of legal scholars have considerable influence on the courts. In most jurisdictions the core areas of private law are codified in the form of a civil code, but in some, like Scotland it remains uncodified. The civil law system has its origins in Roman law, which was adopted by scholars and courts from the late middle ages onwards. Most modern systems go back to the 19th century codification movement. The civil codes of many, particularly Latin countries and former French and Spanish colonies closely trail the Code de Napoléon in some fashion. However, this is not true for most Central and Eastern European, Scandinavian and East Asian countries. Notably, the German BGB was developed from Roman law with reference to German legal tradition. The importance of the Code Napoléon should also not be overemphasized as it covers only the core areas of private law, while other codes and statutes govern fields such as corporate law, administrative law, tax law and constitutional law.

Common law

The Common law is an Anglo-Saxon legal tradition, based on unwritten laws developed through judicial decisions that create binding precedent. The common law system is currently in practice in Australia, Canada (excluding Quebec), United Kingdom, and the United States (excluding Louisiana). In addition to these countries several others have adapted the common law system into a mixed system. For example, India and Nigera operate largely on a common law system but incorporate a good deal of customary law and religious law.

Customary law

Customary law are systems of law that has evolved largely on their own within a given country and have been adapted to meet the needs of the particular culture. Note that customary law may also be relevant within jurisdictions following another legal tradition in fields or subfields of law where no legislative enactment exists. For example, in Austria, scholars of private law often claim that customary law continues to exist, whereas public law scholars dispute this claim. (In any case, it is hard to find any practically relevant examples.)

Religious law

Many countries base their system of law on religious tenants. The most dominant system of this form of law is Muslim law (or "Sharia") which is a codified law that is found within the Koran. These laws deal primarily with the personal rights and dispute resolution between individuals. It is used in some Middle Eastern nations; such as in the Iran and Saudi Arabia. On a smaller level there are still regions of the world that practice canon law, which is followed by Catholics and Anglicans, and a similar legal system is used by the Eastern Orthodox Church. The same can be said for Jewish law (halakha or halacha), which is followed by Orthodox and Conservative Jews, in substantially different forms.

Bodies of law

In the broadest sense, bodies of law can be subdivided on the basis of who the parties to an action are. It is frequent that practiced fields of law overlap into several of these bodies of law.

Private law

The area of private law in a legal system concerns law that oversees disputes between private individuals. This area is, to a large extent, the most comprehensive area of law, dealing with all non-criminal harm one person does to another.

Public law

The area of public law, in a general sense, is the law in a given legal system that concerns disputes between the government and private individuals residing within the country. The state can bring actions against people for criminal acts, as well as breach of regulatory laws. Equally, individuals can bring actions against the government for harm it has done. This includes grounds on the basis of a breach of regulations, legislate on matters beyond their competence, or violation of an individuals rights. These last two points are often protected under a countries’ constitution.

Procedural law

Procedural law concerns the areas of law that regulate how all actions are dealt with. This includes who can have access to the court system, how complaints are submitted, and what are the rights of the parties involved. Procedural law is often known as "adjective" law as it is the law that concern how other laws are to be applied. Typically, this is broadly covered by a government’s civil and criminal procedure rules. But equally this includes the law of evidence which determines what means are used to prove facts, as well as, the law regarding remedies.

International law

International law governs the relations between states, or between citizens of different states, or international organizations. Its two primary sources are customary law and treaties.

Philosophy of law

Philosophy of law is a branch of philosophy and jurisprudence which studies basic questions about law and legal systems, such as "what is the law?", "what are the criteria for legal validity?", "what is the relationship between law and morality?", and many other similar questions. In the western tradition there are several schools of thought on the philosophical basis of law. First, there is natural law, which attempts to describe law as an inherent quality in humans that is derived from natures. Second, there is the positivism which believes that law is a purely human-made construct that society uses to maintain social order. Third, there is legal realism which believes that law is an arbitrary set of rules that are largely established through the tastes and preferences of judges.

Anthropology of law

:See main discussion at Honour Law has an anthropological dimension. It has been recognized from Montesquieu to the present that law is shaped by the kind of society in which it is practised. One continuum into which various societies can be placed contrasts the "culture of law" with the "culture of honour". In order to have a culture of law, people must dwell in a society where a government exists whose authority is hard to evade and generally recognised as legitimate. People take their grievances before the government and its agents, who arbitrate disputes and enforce penalties. This behaviour is contrasted with the culture of honour, where respect for persons and groups stems from fear of the revenge they may exact if their person, property, or prerogatives are not respected. Cultures of law must be maintained. They can be eroded by declining respect for the law, achieved either by weak government unable to wield its authority, or by burdensome restrictions that attempt to forbid behaviour prevalent in the culture or in some subculture of the society. When a culture of law declines, there is a possibility that an culture of honor will arise in its place.
History

Practice of law
Practice of law is typically overseen by either a government organization or independent regulating body such as a bar association or barrister society. To practice law – i.e. appear in front of a judge on behalf of someone, draft legal documents, etc. – the practitioner must be certified by the regulating body. This usually entails a two or three year program at a university’s faculty of law or a law school, followed by an entrance examination (eg. bar admissions). Once accredited, a legal practitioners will often work in law firm, as well as in government, a private corporation, or even work as sole practitioner. A significant component to the practice of law in the common law tradition involves legal research in order to determine the current state of the law. This usually entails exploring case reporters, legal periodicals, and legislation.
See also

- Law topics overview
- List of areas of law
- List of legal topics
- List of legal terms
- List of jurists
- List of legal abbreviations
- List of case law lists
- List of law firms
Further reading

- Cheyenne Way: Conflict & Case Law in Primitive Jurisprudence, Karl N. Llewellyn and E. Adamson Hoebel, University of Oklahoma Press, 1983, trade paperback, 374 pages, ISBN 0806118555
- The Bilingual LSP Dictionary. Principles and Practice for Legal language, Sandro Nielsen, Gunter Narr Verlag 1994.
- [http://browse.addall.com/Browse/Author/2088479-1 Other books by Karl N. Llewellyn]
- David, René, and John E. C. Brierley. Major Legal Systems in the World Today: An Introduction to the Comparative Study of Law. 3d ed. London: Stevens, 1985 (ISBN 0420473408).
External links

- [http://www.legalmatch.com LegalMatch] Legal Resource
- [http://ausicl.com The Australian Institute of Comparative Legal Systems]
- [http://www.lpig.org Law and Policy Institutions]
- [http://www.llbee.com/news.php?p=news Laws External Education- Legal News By Subject]
- [http://www.4lawschool.com 4LawSchool- Legal Reference]
- [http://ww3.definitions-legal.com:8567/ Law, Legal Definitions & Reference]
- [http://www.ericdigests.org/1996-3/law.htm Essentials of Law-Related Education. ERIC Digest.]
- [http://www.law.cornell.edu LII - Topical overviews, US Supreme Court decisions, US Code (Acts of Congress)]
- [http://www.worldlii.org WorldLII - The World Legal Information Institute]
- [http://www.lawmoose.com LawMoose Legal Reference Library]
- [http://legallinks.jenkinslaw.org Legal Research Links]
- [http://www.findlaw.com FindLaw]
- [http://ausicl.com The Australian Institute of Comparative Legal Systems]
- [http://www.nolo.com/glossary.cfm Everybody's Legal Glossary] - From Nolo
- [http://www.alllaw.com/ AllLaw]
- [http://legal.wikicities.com/ WikiCities Legal Site]
- Stanford Encyclopedia of Philosophy:
- [http://plato.stanford.edu/entries/law-ideology/ Law and Ideology]
- [http://plato.stanford.edu/entries/law-language/ Law and Language]
- [http://en.jurispedia.org/ The shared law] in Jurispedia
- [http://www.avocatura.com Romanian Law]
- [http://www.thedailylaw.com Daily Law news]
- [http://members.fortunecity.com/victorcauchi/lex/lexindex.htm Laws of Malta] Chapter summaries and a general Glossary of definitions.
- [http://LawyerIntl.com LawyerIntl.com] Legal Resource and Law Dictionary
- [http://LawGuru.com LawGuru.com] Legal Portal
- [http://forumprawne.org Prawo i porady prawne] - web discussion board about Polish law Category:Core issues in ethics ja:法 (法学) simple:Law th:กฎหมาย

Risk management

:For non-business risks, see Risk or the disambiguation page risk analysis. Generally, Risk Management is the process of measuring, or assessing risk and then developing strategies to manage the risk. In general, the strategies employed include transferring the risk to another party, avoiding the risk, reducing the negative effect of the risk, and accepting some or all of the consequences of a particular risk. Traditional risk management, which is discussed here, focuses on risks stemming from physical or legal causes (e.g. natural disasters or fires, accidents, death, and lawsuits). Financial risk management, on the other hand, focuses on risks that can be managed using traded financial instruments. Regardless of the type of risk management, all large corporations have risk management teams and small groups and corporations practice informal, if not formal, risk management. In ideal risk management, a prioritization process is followed whereby the risks with the greatest loss and the greatest probability of occurring are handled first, and risks with lower probability of occurrence and lower loss are handled later. In practice the process can be very difficult, and balancing between risks with a high probability of occurrence but lower loss vs. a risk with high loss but lower probability of occurrence can often be mishandled. Risk management also faces a difficulty in allocating resources properly. This is the idea of opportunity cost. Resources spent on risk management could be instead spent on more profitable activities. Again, ideal risk management spends the least amount of resources in the process while reducing the negative effects of risks as much as possible.

Steps in the risk management process

A definitive generic description of risk management that originated in Australia and New Zealand, now being taken up in many other countries, is set out in the Australian & New Zealand STandard 4360:2004. The core of the process is a series of five steps: - Establish the context - Identify risks - Analyse risks - Evaluate risks - Treat risks In parallel with the core process, communication & consultation is required to ensure adequate information is provided and conclusions are disemminated,. Monitoring and review is an intrinsic part of the process required to ensure that the process is executed in a timely fashion and the identification, analysis, evaluation and treatment are kept up to date. The standard can be found at www.standards.com.au and simple guidance on its application can bbe found at www.broadleaf.com.au/tutorials/Default.htm

Establish the context

Establishing the context includes planning the remainder of the process and mapping out the scope of the exercise, the identity and objectives of stakeholders, the basis upon which risks will be evaluated and defining a framework for the process, and agenda for identification and analysis.

Identification

After establishing the context, the next step in the process of managing risk is to identify potential risks. Risks are about events that, when triggered, will cause problems. Hence, risk identification can start with the source of problems, or with the problem itself.
- Source analysis Risk sources may be internal or external to the system that is the target of risk management. Examples of risk sources are: stakeholders of a project, employees of a company or the weather over an airport.
- Problem analysis Risks are related to fear. For example: the fear of losing money, the fear of abuse of privacy information or the fear of accidents and casualties. The fear may exist with various entities, most important with shareholder, customers and legislative bodies such as the government. When either source or problem is known, the events that a source may trigger or the events that can lead to a problem can be investigated. For example: stakeholders withdrawing during a project may endanger funding of the project; privacy information may be stolen by employees even within a closed network; lightning striking a B747 during takeoff may make all people onboard immediate casualties. The chosen method of identifying risks may depend on culture, industry practice and compliance. The identification methods are formed by templates or the development of templates for identifying source, problem or event. Common risk identification methods are:
- Objectives-based Risk Identification Organizations and project teams have objectives. Any event that may endanger achieving an objective partly or completely is identified as risk. Objective-based risk identification is at the basis of COSO's [http://www.coso.org/Publications/ERM/COSO_ERM_ExecutiveSummary.pdf Enterprise Risk Management - Integrated Framework]
- Scenario-based Risk Identification In scenario analysis different scenarios are created. The scenarios may be the alternative ways to achieve an objective, or an analysis of the interaction of forces in, for example, a market or battle. Any event that triggers an undesired scenario alternative is identified as risk.
- Taxonomy-based Risk Identification The taxonomy in taxonomy-based risk identification is a breakdown of possible risk sources. Based on the taxonomy and knowledge of best practices, a questionnaire is compiled. The answers to the questions reveal risks. Taxonomy-based risk identification in software industry can be found in [http://www.sei.cmu.edu/publications/documents/93.reports/93.tr.006.html CMU/SEI-93-TR-6].
- Common-risk Checking In several industries lists with known risks are available. Each risk in the list can be checked for application to a particular situation. An example of known risks in the software industry is the Common Vulnerability and Exposures list found at http://cve.mitre.org.

Assessment

Once risks have been identified, they must then be assessed as to their potential severity of loss and to the probability of occurrence. These quantities can be either simple to measure, in the case of the value of a lost building, or impossible to know for sure in the case of the probability of an unlikely event occurring. Therefore, in the assessment process it is critical to make the best educated guesses possible in order to properly prioritize the implementation of the risk management plan.

Potential Risk Treatments

Once risks have been identified and assessed, all techniques to manage the risk fall into one or more of these four major categories: (Dorfman, 1997)
- Transfer
- Avoidance
- Reduction (aka Mitigation)
- Acceptance (aka Retention) Ideal use of these strategies may not be possible. Some of them may involve trade offs that are not acceptable to the organization or person making the risk management decisions.

Risk avoidance

Includes not performing an activity that could carry risk. An example would be not buying a property or business in order to not take on the liability that comes with it. Another would be not flying in order to not take the risk that the airplane were to be hijacked. Avoidance may seem the answer to all risks, but avoiding risks also means losing out on the potential gain that accepting (retaining) the risk may have allowed. Not entering a business to avoid the risk of loss also avoids the possibility of earning the profits.

Risk reduction

Involves methods that reduce the severity of the loss. Examples include sprinklers designed to put out a fire to reduce the risk of loss by fire. This method may cause a greater loss by water damage and therefore may not be suitable. Halon fire suppression systems may mitigate that risk, but the cost may be prohibitive as a strategy. Modern software development methodologies reduce risk by developing and delivering software incrementally. Early methodologies suffered from the fact that they only delivered software in the final phase of development; any problems encountered in earlier phases meant costly rework and often jeopardized the whole project. By developing in increments, software projects can limit effort wasted to a single increment. A current trend in software development, spearheaded by the Extreme Programming community, is to reduce the size of increments to the smallest size possible, sometimes as little as one week is allocated to an increment.

Risk retention

Involves accepting the loss when it occurs. True self insurance falls in this category. Risk retention is a viable strategy for small risks where the cost of insuring against the risk would be greater over time than the total losses sustained. All risks that are not avoided or transferred are retained by default. This includes risks that are so large or catastrophic that they either cannot be insured against or the premiums would be infeasible. War is an example since most property and risks are not insured against war, so the loss attributed by war is retained by the insured. Also any amounts of potential loss (risk) over the amount insured is retained risk. This may also be acceptable if the chance of a very large loss is small or if the cost to insure for greater coverage amounts is so great it would hinder the goals of the organization too much.

Risk transfer

Means causing another party to accept the risk, typically by contract or by hedging. Insurance is one type of risk transfer that uses contracts. Other times it may involve contract language that transfers a risk to another party without the payment of an insurance premium. Liability among construction or other contractors is very often transferred this way. On the other hand, taking offsetting positions in derivatives is typically how firms use hedging to financial risk management: financially manage risk. Some ways of managing risk fall into multiple categories. Risk retention pools are technically retaining the risk for the group, but spreading it over the whole group involves transfer among individual members of the group. This is different from traditional insurance, in that no premium is exchanged between members of the group up front, but instead losses are assessed to all members of the group.

Create the plan

Decide on the combination of methods to be used for each risk

Implementation

Follow all of the planned methods for mitigating the effect of the risks. Purchase insurance policies for the risks that have been decided to be transferred to an insurer, avoid all risks that can be yes... avoided without sacrificing the entity's goals, reduce others, and retain the rest.

Review and evaluation of the plan

Initial risk management plans will never be perfect. Practice, experience, and actual loss results, will necessitate changes in the plan and contribute information to allow possible different decisions to be made in dealing with the risks being faced.

Limitations

If risks are improperly assessed and prioritized, time can be wasted in dealing with risk of losses that are not likely to occur. Spending too much time assessing and managing unlikely risks can divert resources that could be used more profitably. Unlikely events do occur, but if the risk is unlikely enough to occur, it may be better to simply retain the risk, and deal with the result if the loss does in fact occur. Prioritizing too highly the Risk management processes itself could potentially keep an organization from ever completing a project or even getting started. This is especially true if other work is suspended until the risk management process is considered complete.

Areas of risk management

As applied to corporate finance, risk management is a technique for measuring, monitoring and controlling the financial or operational risk on a firm's balance sheet. See value at risk.

Enterprise Risk Management

In Enterprise Risk Management, a risk is defined as a possible event or circumstance that can have negative influences on the Enterprise in question. Its impact can be on the very existance, the resources (human and capital), the products and services, or the customers of the Enterprise, as well as external impacts on Society, Markets or the Environment. ((Author's Note Amazingly whenever Risk is considered this is often the last Risk to be formally evaluated with such things as Project Risk receiving much higher attention??))

Project management

In project management, a risk is more narrowly defined as a possible event or circumstance that can have negative influences on a project. Its influence can be on the schedule, the resources, the scope and/or the quality. In project management parlance, when a risk escalates, it becomes a liability. A liability is a negative event or circumstance that is hindering the project. Some of the processes for assessing risk include the following (the parentheses contain some of the jargon used to refer to them).
- Choosing unique identifiers for referring to the same risk in company or project documents (identification).
- Describing the risk and how it could become a liability (description).
- Assessing the consequences of that (effect).
- Considering what precautions could be taken to prevent it (precaution).
- Drawing up contingency plans or procedures for handling it (contingency).
- Categorizing the risk as new, ongoing or closed (risk status)
- Estimating the probability of the risk becoming a liability (Risk escalation probability, P)
- Estimating the consequences in terms of time for the project (Schedule impact, S) In addition, every probable risk can have a pre-formulated plan to deal with it to deal with its possible consequences (to ensure contingency if the risk becomes a liability). From the information above and the average cost per employee over time, or Cost Accrual Ratio, a project manager can estimate
- the cost associated with the risk if it arises, estimated by multiplying employee costs per unit time by the estimated time lost (cost impact, C where C = Cost Accrual Ratio
- S)
- the probable increase in time associated with a risk (schedule variance due to risk, Rs where Rs = P
- S):
- Sorting on this value puts the highest risks to the schedule first. This is intended to cause the greatest risks to the project to be attempted first so that risk is minimized as quickly as possible.
- This is slightly misleading as schedule variances with a large P and small S and visa-versa are not equivalent. (The risk of the RMS Titanic sinking vs. the passengers' meals being served at slightly the wrong time).
- the probable increase in cost associated with a risk (cost variance due to risk, Rc where Rc = P
- C = P
- CAR
- S = P
- S
- CAR)
- sorting on this value puts the highest risks to the budget first.
- see concerns about schedule variance as this is a function of it, as illustrated in the equation above. Risk in a project or process can be due either to special causes of deviation or common causes of deviation and requires appropriate treatment. That is to re-iterate the concern about extremal cases not being equivalent in the list immediately above.

Risk management activities as applied to project management

In project management, risk management includes the following activities:
- Planning how risk management will be held in the particular project. Plan should include risk management tasks, responsibilities, activities and budget.
- Assigning risk officer - a team member other than a project manager who is responsible for foreseeing potential project problems. Typical characteristic of risk officer is a healthy skepticism.
- Maintaining live project risk database. Each risk should have the following attributes: opening date, title, short description, probability and importance. Optionally risk can have assigned person responsible for its resolution and date till then risk still can be resolved.
- Creating anonymous risk reporting channel. Each team member should have possibility to report risk that he foresees in the project.
- Preparing mitigation plans for risks that are chosen to be mitigated. The purpose of the mitigation plan is to describe how this particular risk will be handled – what, when, by who and how will be done to avoid it or minimize consequences if it becomes a liability.
- Summarizing planned and faced risks, effectiveness of mitigation activities and effort spend for the risk management.

References

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-
-

External links

Risk Management Certification programs

- [http://www.prmia.org/certification/candidate_info.html The Professional Risk Manager Certification (PRM)]
- [http://www.aicpcu.org/flyers/arm.htm IIA & CPCU Associate in Risk Management Certification (ARM)]
- [http://www.rmahq.org/RMA/KnowledgeandTrainingCenter/AssessmentCenter/Certification/ RMA Certification]
- [http://www.garp.com/ GARP Certification]
- [http://www.bai.org/crp/ BAI Certified Risk Professional]
- [http://www.theiia.org/?doc_id=31 IIA Certification in Control Self-Assessment]

Associations

- International Risk Governance Council
- [http://www.prmia.org/ The Professional Risk Managers' International Association (PRMIA)] (http://www.prmia.org/)
- [http://www.ashrm.org/ The American Society for Healthcare Risk Management (ASHRM)]
- [http://www.theirm.org The Institute of Risk Management (IRM)] Category:Management Category:Project management category:Risk Category:Security ja:リスクマネジメント th:การจัดการความเสี่ยง

Risk

:This article is about the concept of risk. There is also a popular board game named Risk (game), and Risk (album). Risk is the potential harm that may arise from some present process or from some future event. In everyday usage, "risk" is often used synonymously with "probability", but in professional risk assessments, risk combines the probability of a negative event occurring with how harmful that event would be.

Definitions

Risk is often mapped to the probability of some event which is seen as undesirable. Usually the probability of that event and some assessment of its expected harm must be combined into a believable scenario (an outcome) which combines the set of risk, regret and reward probabilities into an expected value for that outcome. There are many informal methods which are used to assess (or to "measure" although it is not usually possible to directly measure) risk, and (for some applications) formal methods such as value at risk. In scenario analysis "risk" is distinct from "threat." A threat is a very low-probability but serious event - which some analysts may be unable to assign a probability in a risk assessment because it has never occurred, and for which no effective preventive measure (a step taken to reduce the probability or impact of a possible future event) is available. The difference is most clearly illustrated by the precautionary principle which seeks to reduce threat by requiring it to be reduced to a set of well-defined risks before an action, project, innovation or experiment is allowed to proceed. In information security a "risk" is defined as a function of three variables: the probability that there's a threat, the probability that there are any vulnerabilities, and the potential impact. If any of these variables approaches zero, the overall risk approaches zero. For example, human beings are completely vulnerable to the threat of mind control by aliens, which would have a fairly serious impact. But as we haven't yet met aliens, we can assume that they don't pose much of a threat, and the overall risk is almost zero.

Background

Scenario analysis matured during Cold War confrontations between major powers, notably the USA and USSR, but was not widespread in insurance circles until the 1970s when major oil tanker disasters forced a more comprehensive foresight. It entered finance until the 1980s when financial derivatives proliferated. It did not reach most professions in general until the 1990s when personal computers proliferated. Governments are apparently only now learning to use sophisticated risk methods, most obviously to set standards for environmental regulation, e.g. "pathway analysis" as practiced by the US EPA.

Risk in business

See also insurance industry Means of measuring and assessing risk vary widely across different professions--indeed, means of doing so may define different professions, e.g. a doctor manages medical risk, a civil engineer manages risk of structural failure, etc. A professional code of ethics is usually focused on risk assessment and mitigation (by the professional on behalf of client, public, society or life in general).

Risk-sensitive industries

Some industries manage risk in a highly-quantified and numerate way. These include the nuclear power and aircraft industries, where the possible failure of a complex series of engineered systems could result in highly undesirable outcomes. The usual measure of risk for a class of events is then Risk = Probability (of the Event) times Consequence. (The total risk is then the sum of the individual class-risks) The risks are evaluated using Fault Tree/Event Tree techniques (see safety engineering). Where these risks are low they are normally considered to be 'Broadly Acceptable'. A higher level of risk (typically up to 10 to 100 times BA) has to be justified against the costs of reducing it further and the possible benefits that make it tolerable - these risks are described as 'Tolerable if ALARP'. Risks beyond this level are of course 'Intolerable'. The level of risk deemed 'Broadly Acceptable' has been considered by Regulatory bodies in various countries - an early attempt by UK government regulator & academic F. R. Farmer used the example of hill-walking and similar activities which have definable risks that people appear to find acceptable. This resulted in the so-called Farmer Curve, of acceptable probability of an event versus its consequence. The technique as a whole is usually refered to as Probabilistic Risk Assessment (PRA), (or Probabilistic Safety Assessment, PSA). See WASH-1400 for an example of this approach.

Risk in finance

Risk in finance has no one definition, but some theorists, notably Ron Dembo, have defined quite general methods to assess risk as an expected after-the-fact level of regret. Such methods have been uniquely successful in limiting interest rate risk in financial markets. Financial markets are considered to be a proving ground for general methods of risk assessment. However, these methods are also hard to understand. The mathematical difficulties interfere with other social goods such as disclosure, valuation and transparency. In particular, it is often difficult to tell if such financial instruments are "hedging" (decreasing measurable risk by giving up certain windfall gains) or "gambling" (increasing measurable risk and exposing the investor to catastrophic loss in pursuit of very high windfalls that increase expected value). As regret measures rarely reflect actual human risk-aversion, it is difficult to determine if the outcomes of such transactions will be satisfactory. Risk seeking describes an individual who has a positive second derivative of his/her utility function. Such an individual would willingly (actually pay a premium to) assume all risk in the economy and is hence not likely to exist. In financial markets one may need to measure credit risk, information timing and source risk, probability model risk, and legal risk if there are regulatory or civil actions taken as a result of some "investor's regret".

Psychology of risk

Main articles: decision theory, prospect theory

Regret

Main article: regret theory In decision theory, regret (and anticipation of regret) can play a significant part in decision-making, distinct from risk aversion (preferring the status quo in case one gets worse off).

Framing

Framing is a fundamental problem with all forms of risk assessment. In particular, because of bounded rationality (our brains get overloaded, so we take mental shortcuts) the risk of extreme events is discounted because the probability is too low to evaluate intuitively. As an example, one of the leading causes of death is road accidents caused by speeding - partly because any given driver frames the problem by largely or totally ignoring the risk of a serious or fatal accident. The above examples: body, threat, price of life, professional ethics and regret show that the risk adjustor or assessor often faces serious conflict of interest. The assessor also faces cognitive bias and cultural bias, and cannot always be trusted to avoid all moral hazards. This represents a risk in itself, which grows as the assessor is less like the client. For instance, an extremely disturbing event that all participants wish not to happen again may be ignored in analysis despite the fact it has occurred and has a nonzero probability. Or, an event that everyone agrees is inevitable may be ruled out of analysis due to greed or an unwillingness to admit that it is believed to be inevitable. These human tendencies to error and wishful thinking often affect even the most rigorous applications of the scientific method and are a major concern of the philosophy of science. But all decision-making under uncertainty must consider cognitive bias, cultural bias, and notational bias: No group of people assessing risk is immune to "groupthink": acceptance of obviously-wrong answers simply because it is socially painful to disagree. One effective way to solve framing problems in risk assessment or measurement (although some argue that risk cannot be measured, only assessed) is to ensure that scenarios, as a strict rule, must include unpopular and perhaps unbelievable (to the group) high-impact low-probability "threat" and/or "vision" events. This permits participants in risk assessment to raise others' fears or personal ideals by way of completeness, without others concluding that they have done so for any reason other than satisfying this formal requirement. For example, an intelligence analyst with a scenario for an attack by hijacking might have been able to insert mitigation for this threat into the U.S. budget. It would be admitted as a formal risk with a nominal low probability. This would permit coping with threats even though the threats were dismissed by the analyst's superiors. Even small investments in diligence on this matter might have disrupted or prevented the attack-- or at least "hedged" against the risk that an Administration might be mistaken.

Fear as intuitive risk assessment?

For the time being, we must rely on our own fear and hesitation to keep us out of the most profoundly unknown circumstances. In "The Gift of Fear", Gavin de Becker argues that "True fear is a gift." (from book jacket) "It is a survival signal that sounds only in the presence of danger. Yet unwarranted fear has assumed a power over us that it holds over no other creature on Earth. It need not be this way." Risk could be said to be the way we collectively measure and share this "true fear" - a fusion of rational doubt, irrational fear, and a set of unquantified biases from our own experience. The field of behavioral finance focuses on human risk-aversion, asymmetric regret, and other ways that human financial behavior varies from what analysts call "rational". Risk in that case is the degree of uncertainty associated with a return on an asset. A recognition of, and respect for, the irrational influences on our decisions, may go far in itself to reduce disasters due to naive risk assessments that pretend to rationality but in fact merely fuse many shared biases together.

Two widely used antidotes for high risk

#Diversification: #
- Investing in more than one potential innovation lowers risk #Multiple approaches: #
- Pursue two or more possible paths to a single innovation simultaneously #
- Can only have one winner #
- Reduces risk but costs more (may reduce expected return)

References

Papers

- Holton, Glyn A. (2004). [http://www.riskexpertise.com/papers/risk.pdf Defining Risk], Financial Analysts Journal, 60 (6), 19–25. A paper exploring the foundations of risk. (PDF file)

Books

A good example for a risk-controlling, yet utopian civilisation was written by Ian M. Banks in his science fiction Culture novels.

Magazines

- [http://www.riskandinsurance.com/ Risk and Insurance : Home]
- [http://www.actuary.net/ Actuary .NET Actuarial News and Risk Management Info: Home]
- [http://www.actuarialnews.org/ Actuarial News And Risk Management Resource : Home]

External links

- [http://www.risk-glossary.com/ Glossary]
- [http://www-groups.dcs.st-and.ac.uk/~history/Quotations/Whitehead.html Whitehead quotations]
- [http://www.gametheory.net/Mike/applets/Risk/ Certainty equivalents applet] Category:Core issues in ethics Category:Risk ja:リスク th:ความเสี่ยง

Loss

Loss has several meanings including:
- Loss in electronics is the ratio of the system output to system input
- In electronics, loss is the ratio of system output to system input. Calculation and units used are the same as with Gain, except that the output is less than the input. Loss is often expressed as a negative gain (if expressed in dB) or as a gain of less than one.
- For example: if input=100 mW and output=5 mW then
- loss = 5/100 = 0.05 = −1.3 B (bel) or −13 dB
- Loss in insurance is the reduction in economical value after an event occurs. It can take the form of a property or a casualty loss.
- Loss in finance is the reduction in economical value of an asset or the mark-to-market of a derivative.
- Slang for someone not liked very much.
- Loss, the debut album of Mull Historical Society.
- For loss as the pitching statistic in baseball, see Win (baseball).

Risk

Definitions

Background

Risk in business

Risk-sensitive industries

Risk in finance

Psychology of risk

Main articles: decision theory, prospect theory

Regret

Framing

Fear as intuitive risk assessment?

Two widely used antidotes for high risk

References

Papers

- Holton, Glyn A. (2004). [http://www.riskexpertise.com/papers/risk.pdf Defining Risk], Financial Analysts Journal, 60 (6), 19–25. A paper exploring the foundations of risk. (PDF file)

Books

A good example for a risk-controlling, yet utopian civilisation was written by Ian M. Banks in his science fiction Culture novels.

Magazines

External links

Tina Turner

Tina Turner (born Anna Mae Bullock on November 26, 1939 in Nutbush, now Brownsville, Tennessee) is an American R&B, pop, rock and soul singer, Buddhist and occasional actress. She is well-known for her scorching performances with The Ike and Tina Turner Revue during the 1960s and 1970s, and best known for her remarkable solo comeback in the mid-1980s. Tina Turner is noted for her overpowering stage presence -- long legs, big hair, and powerful voice.

Biography

Ike & Tina Turner

Anna Mae Bullock was discovered by Ike Turner, a noted pioneer of rock and roll, whom she later married. She began as an occasional vocalist in his show at the age of 18, but within a couple of years she not only had a new name, but was the spotlight of a popular soul revue led by Ike Turner and his Kings of Rhythm. Ike and Tina had one child together, although their extendend family consisted of two sons from a previous relationship and a son that Tina had with a saxophone player in Ike Turner's band named Raymond Hill. Ike and Tina Turner recorded a number of hits in the 1960s and early 1970s, including "A Fool In Love", "It's Gonna Work Out Fine", "I Idolize You", "Nutbush City Limits", and the legendary "River Deep - Mountain High" (with producer Phil Spector). Many of their recordings never charted, but the Ike and Tina Turner Review was best known for their live acts. Their act was always performering anywhere and everywhere. Their signature hit became their frantic cover version of Creedence Clearwater Revival's "Proud Mary" (1971).

Beginning a solo career: What's Love Got to Do with It?

Ike's alleged increasingly abusive behavior led Tina to abruptly leave him in

Insurance

Principles of insurance

Indemnification

Example: home insurance

How an insurance company makes money

Determination of rate structures

Gambling analogy

History of insurance

Types of insurance

Types of insurance companies

Life insurance and saving

Financial viability of insurance companies

Controversies

Insurance insulates too much

Complexity of insurance policy contracts

Redlining

Health insurance

Dental insurance

Insurance Patents

The insurance industry and rent seeking

Glossary

Quote

See also

Lists

External links

Law

Legal traditions

Civil law

Common law

Customary law

Religious law

Bodies of law

Private law

Public law

Procedural law

International law

Philosophy of law

Anthropology of law

History

Practice of law

See also

Further reading

External links

Risk management

Steps in the risk management process

Establish the context

Identification

Assessment

Potential Risk Treatments

Risk avoidance

Risk reduction

Risk retention

Risk transfer

Create the plan

Implementation

Review and evaluation of the plan

Limitations

Areas of risk management

Enterprise Risk Management

Project management

Risk management activities as applied to project management

References

Further reading

See also

External links

Risk Management Certification programs

Associations

Risk

Definitions

Background

Risk in business

Risk-sensitive industries

Risk in finance

Psychology of risk

Regret

Framing

Fear as intuitive risk assessment?

Two widely used antidotes for high risk

References

Papers