Section 1　The concept of risk

1.1　The definition of risk

When we use the word “risk”, we mean it will possibly cause losses or damages to someone when it happens. The outcome may be serious. In this way, we can say fire is a risk, theft is a risk, and personal injury is a risk and so on. What is the meaning of risk?

Risk can be defined as the possibility or uncertainty of damage and loss, but it does not mean that the damage and loss have happened on a certain property.1

Risk is the possibility of an unfortunate or unpleasent occurrence.

Risk is a combination of hazards. Risk is unpredictable, it means that the actual results are different from predicted results.2

After we study the definitions, we know there are some common characteristics in each of them. First of all, risk refers a state of doubt about the future.3 Secondly, it means that there are different levels or degrees of risk. Thirdly, it implicates the result or outcome has been brought by a cause or some causes.

1.1.1　The cases of uncertainty of risk

If a boy plays football in a busy road, what will happen to him? If a man uses a machine when he does not know it is in trouble and dangerous, what will happen to him? And if a passerby dose not know the wall alongside the pavement is dangerous and about to fall down because of being for long years out of repair, what will happen to him? In the above three examples, there is a factor of risk and uncertainty. The boy may keep out of danger, but he may hit by a certain car. The machine may fall down suddenly and hit the passerby. If he is lucky, the machine dose not explode until he has done the work. And if the wall suddenly fall down, it can hit the passerby. If he is quick enough, he may escape from the weakened wall.

In a word, whether the risk happens or not depends on luckiness and fortune in above three examples. We can conclude that uncertainty is not dependent on whether you recognize it or not. It always exists around us.4

1.1.2　Relations between peril and hazard

Peril means the possibility that something is likely to cause injury, pain, harm, or loss and damage.5 It is a risk accident. Hazard means something that increases the possibility of a loss. It is a factor that influences the outcome.

When it snows in winter in north of China, the streets and roads are covered with ice. The cars will face the risk of turning over. The risk of slippery road does not really make sense. What we mean is the risk of causing traffic accident. Ice is the cause of the traffic accident and the fact that slippery road influences the outcome.

Hazards are not themselves the cause of the loss, but they can increase or decrease the effect if a peril operates. The consideration of hazard is important when an insurance company is deciding whether or not it should insure some risk and what premium to charge.

We can conclude that the traffic accident is the peril and ice or slippery road is the hazard. The peril is the prime cause. Often it is beyond the control of anyone who may be involved. In this way, we can say that the storm, fire, theft, motor accident and explosion are all perils.

Hazard can be physical or moral. Physical hazard relates to the physical cha-racteristics of the risk, such as the nature of construction of a building, security protection at a shop or factory, or driving cars in a slippery road in winter. Moral hazard refers to the intangible factors related to a person's moral cultivation. If someone uses dishonesty or bad attempts or fraud to intentionally make a risk accident, or enlarge the loss of a risk accident. If a car driver intentionally drives illegally. We think these are moral hazards. In addition, acts such as deception, arson and theft are all moral hazards.

1.2　The classification of risk

1.2.1　Financial and non-financial risk

A financial risk is one where the result or the outcome can be measured by money. For example, material damage to property, theft of property, house being damaged because of a fire, etc. All of them belong to financial risks. In case of the risk of personal injury, it can also be possible to measure the financial loss in the court by the judge awarding damages to the insured or make the settlement of the financial loss by negotiating between lawyers and insurers.

Non-financial risk would refer to anything that is not monetary or that which cannot be associated or viewed in terms of money.6 For example, if you choose a new car from a car dealer, or select an item from a restaurant menu, we cannot say that they belong to financial risks. Other examples are the selection of your career, the choice of your marriage partner or spouse. All of these are non-financial risks because they cannot be measured by money.

1.2.2　Pure and speculative risk

1.2.2.1　Pure risk

Pure risk refers to a loss or not loss. There is no chance of gaining profits.7 The outcome is not favorable to us if a loss happens. And if an event does not occur, we have no loss as we can enjoy the benefit. For example, machinery may break down and take some time to be repaired. We can list a lot of of examples: the risk of a motor accident, fire at a company, theft of goods from the factory, or injury at work, etc. All of them are pure risks.

1.2.2.2　Speculative risk

Speculative risk refers to a loss, no loss or the chance of gaining pro-fits.8 For example, when you invest money in stock and security market, you may result in a loss, or no loss, if you are lucky, you may have the chance of gaining profits in the investment.For another example, if the manufacturer sells goods on credit to a customer, hoping to gain profits. But he may take a risk. The client or customer may not pay money to him and the result is that he losses goods. All of the above examples are speculative risks.

1.2.3　Fundamental and particular risks

1.2.3.1　Fundamental risks

Fundamental risks are those which arise from causes outside the control of any individual or even a group of individuals.9 In addition, the effect of fundamental risk affects large number of people. This kind of classification includes earthquakes, floods, famine, volcanoes and other natural disasters. Besides, social changes, political interventions and war can be explained as fundamental risks.

1.2.3.2　Particular risks

Particular risks refer to personal risks. They are much more personal both in the cause and effect. This includes many of the risks we have already mentioned above such as fire, theft, injury and motor accidents. All of these risks arise from individual causes and affect individuals in their outcomes.

In the early part of seventeenth century, people regarded joblessness or unemployment as a particular risk in the west countries. Most of the people believed that being out of job was the fault of individual himself who lacked ability or did not work hard enough. However, technological unemployment of eighties and nineties has changed people's mind due to the changes in industrial and commercial world. People no longer emphasized the fault of individual himself, but paid much more attention to the society as the reason for unemployment.