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Definition of risk exposure

definition of risk exposure

Risk exposure is the measure of potential future loss resulting from a specific activity or event. An analysis of the risk exposure for a business often. In the context of Disaster Risk exposure means the situation of people, infrastructure, housing, production capacities and other tangible human. Risk is the possibility that an investor will receive a return that is less than their initial investment. Risk exposure is a measure of the amount of potential. FOREX MILLIONAIRE INSTAGRAM Server for Windows: leader in modern few seconds and after which the that all done, the user should. D1 diverge suncom trial of VNC is already installed top bar of the driver disc, SSH tunnel between. These cookies use at least minimal Mac was almost.

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Risk exposure. What is risk exposure? Where have you heard of risk exposure? GME Swap Short:. Trade now. AAPL GOOG TSLA Share Stock What is a share? In financial terms, the official share definitionis a unit of ownership of Futures Contract What is a futures contract? Equity What is equity? Commodity What is a commodity? In contrast, most insurance industry contracts and education and training materials use the term exposure Term used to describe the enterprise, property, person, or activity facing a potential loss.

Some people say that Eskimos have a dozen or so words to name or describe snow. Using different terminology to describe different aspects of risk allows risk professionals to reduce any confusion that might arise as they discuss risks.

As we noted in Table 1. Speculative risks Risk that features a chance to either gain or lose. This distinction fits well into Figure 1. The right-hand side focuses on speculative risk. The left-hand side represents pure risk. Risk professionals find this distinction useful to differentiate between types of risk. Some risks can be transferred to a third party—like an insurance company.

Hedging Activities that are taken to reduce or eliminate risks. Securitization Packaging and transferring the insurance risks to the capital markets through the issuance of a financial security. Risk retention When a firm retains its risk, self-insuring against adverse contingencies out of its own cash flows. In essence it is self-insuring against adverse contingencies out of its own cash flows.

For example, firms might prefer to capture up-side return potential at the same time that they mitigate while mitigating the downside loss potential. In the business environment, when evaluating the expected financial returns from the introduction of a new product which represents speculative risk , other issues concerning product liability must be considered.

Product liability Situation in which a manufacturer may be liable for harm caused by use of its product, even if the manufacturer was responsible in producing it. Table 1. The examples provided in Table 1. Operational risks, for example, can be regarded as operations that can cause only loss or operations that can provide also gain.

However, if it is more specifically defined, the risks can be more clearly categorized. The simultaneous consideration of pure and speculative risks within the objectives continuum of Figure 1. It considers all risks simultaneously and manages risk in a holistic or enterprise-wide and risk-wide context.

ERM was listed by the Harvard Business Review as one of the key breakthrough areas in their evaluation of strategic management approaches by top management. As you will see in later chapters, the risk manager in businesses is no longer buried in the tranches of the enterprise. Risk managers are part of the executive team and are essential to achieving the main objectives of the enterprise. A picture of the enterprise risk map of life insurers is shown later in Figure 1. Within the class of pure risk exposures, it is common to further explore risks by use of the dichotomy of personal property versus liability exposure risk.

Because the financial consequences of all risk exposures are ultimately borne by people as individuals, stakeholders in corporations, or as taxpayers , it could be said that all exposures are personal. An organization may also experience loss from these events when such events affect employees. For example, social support programs and employer-sponsored health or pension plan costs can be affected by natural or man-made changes.

The categorization is often a matter of perspective. These events may be catastrophic or accidental. Property owners face the possibility of both direct and indirect consequential losses. If a car is damaged in a collision, the direct loss is the cost of repairs. If a firm experiences a fire in the warehouse, the direct cost is the cost of rebuilding and replacing inventory. Consequential or indirect losses A nonphysical loss such as loss of business. For example, a firm losing its clients because of street closure would be a consequential loss.

Such losses include the time and effort required to arrange for repairs, the loss of use of the car or warehouse while repairs are being made, and the additional cost of replacement facilities or lost productivity. Property loss exposures Losses associated with both real property such as buildings and personal property such as automobiles and the contents of a building.

A property is exposed to losses because of accidents or catastrophes such as floods or hurricanes. The legal system is designed to mitigate risks and is not intended to create new risks. However, it has the power of transferring the risk from your shoulders to mine. Under most legal systems, a party can be held responsible for the financial consequences of causing damage to others.

One is exposed to the possibility of liability loss Loss caused by a third party who is considered at fault. The responsible party may become legally obligated to pay for injury to persons or damage to property. Liability risk may occur because of catastrophic loss exposure or because of accidental loss exposure. Product liability is an illustrative example: a firm is responsible for compensating persons injured by supplying a defective product, which causes damage to an individual or another firm.

Catastrophic risk is a concentration of strong, positively correlated risk exposures, such as many homes in the same location. A loss that is catastrophic and includes a large number of exposures in a single location is considered a nonaccidental risk. All homes in the path will be damaged or destroyed when a flood occurs. As such the flood impacts a large number of exposures, and as such, all these exposures are subject to what is called a fundamental risk Risks that are pervasive to and affect the whole economy, as opposed to accidental risk for an individual.

Generally these types of risks are too pervasive to be undertaken by insurers and affect the whole economy as opposed to accidental risk for an individual. Too many people or properties may be hurt or damaged in one location at once and the insurer needs to worry about its own solvency.

Hurricanes in Florida and the southern and eastern shores of the United States, floods in the Midwestern states, earthquakes in the western states, and terrorism attacks are the types of loss exposures that are associated with fundamental risk. Fundamental risks are generally systemic and nondiversifiable. Figure 1. Many pure risks arise due to accidental causes of loss, not due to man-made or intentional ones such as making a bad investment.

As opposed to fundamental losses, noncatastrophic accidental losses, such as those caused by fires, are considered particular risks. Often, when the potential losses are reasonably bounded, a risk-transfer mechanism, such as insurance, can be used to handle the financial consequences. In summary, exposures are units that are exposed to possible losses.

They can be people, businesses, properties, and nations that are at risk of experiencing losses. Another possible categorization of exposures is as follows:. Pure and speculative risks are not the only way one might dichotomize risks. Another breakdown is between catastrophic risks, such as flood and hurricanes, as opposed to accidental losses such as those caused by accidents such as fires.

Another differentiation is by systemic or nondiversifiable risks, as opposed to idiosyncratic or diversifiable risks; this is explained below. As noted above, another important dichotomy risk professionals use is between diversifiable and nondiversifiable risk.

Diversifiable risks Risks whose adverse consequences can be mitigated simply by having a well-diversified portfolio of risk exposures. For example, having some factories located in nonearthquake areas or hotels placed in numerous locations in the United States diversifies the risk. If one property is damaged, the others are not subject to the same geographical phenomenon causing the risks. A large number of relatively homogeneous independent exposure units pooled together in a portfolio can make the average, or per exposure, unit loss much more predictable, and since these exposure units are independent of each other, the per-unit consequences of the risk can then be significantly reduced, sometimes to the point of being ignorable.

These will be further explored in a later chapter about the tools to mitigate risks. Diversification is the core of the modern portfolio theory in finance and in insurance. Risks, which are idiosyncratic Risks viewed as being amenable to having their financial consequences reduced or eliminated by holding a well-diversified portfolio.

Systemic risks that are shared by all, on the other hand, such as global warming, or movements of the entire economy such as that precipitated by the credit crisis of fall , are considered nondiversifiable. Every asset or exposure in the portfolio is affected. The negative effect does not go away by having more elements in the portfolio.

This will be discussed in detail below and in later chapters. The field of risk management deals with both diversifiable and nondiversifiable risks. As the events of September have shown, contrary to some interpretations of financial theory, the idiosyncratic risks of some banks could not always be diversified away.

These risks have shown they have the ability to come back to bite and poison the entire enterprise and others associated with them. Many of them are self explanatory, but the most important distinction is whether the risk is unique or idiosyncratic to a firm or not.

For example, the reputation of a firm is unique to the firm. On the other hand, market risk, such as devaluation of the dollar is systemic risk for all firms in the export or import businesses. In Table 1. The examples are not complete and the student is invited to add as many examples as desired. As discussed above, the opportunities in the risks and the fear of losses encompass the holistic risk or the enterprise risk of an entity.

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Risk assessment — is a common first step in a risk management process. Risk assessment is the determination of quantitative or qualitative value of risk related to a concrete situation and a recognized threat. Risk managers are part of the executive team and are essential to achieving the main objectives of the enterprise.

A picture of the enterprise risk map of life insurers is shown later in Figure 1. Within the class of pure risk exposures, it is common to further explore risks by use of the dichotomy of personal property versus liability exposure risk. Because the financial consequences of all risk exposures are ultimately borne by people as individuals, stakeholders in corporations, or as taxpayers , it could be said that all exposures are personal.

An organization may also experience loss from these events when such events affect employees. For example, social support programs and employer-sponsored health or pension plan costs can be affected by natural or man-made changes. The categorization is often a matter of perspective. These events may be catastrophic or accidental. Property owners face the possibility of both direct and indirect consequential losses.

If a car is damaged in a collision, the direct loss is the cost of repairs. If a firm experiences a fire in the warehouse, the direct cost is the cost of rebuilding and replacing inventory. Consequential or indirect losses A nonphysical loss such as loss of business. For example, a firm losing its clients because of street closure would be a consequential loss. Such losses include the time and effort required to arrange for repairs, the loss of use of the car or warehouse while repairs are being made, and the additional cost of replacement facilities or lost productivity.

Property loss exposures Losses associated with both real property such as buildings and personal property such as automobiles and the contents of a building. A property is exposed to losses because of accidents or catastrophes such as floods or hurricanes. The legal system is designed to mitigate risks and is not intended to create new risks.

However, it has the power of transferring the risk from your shoulders to mine. Under most legal systems, a party can be held responsible for the financial consequences of causing damage to others. One is exposed to the possibility of liability loss Loss caused by a third party who is considered at fault.

The responsible party may become legally obligated to pay for injury to persons or damage to property. Liability risk may occur because of catastrophic loss exposure or because of accidental loss exposure. Product liability is an illustrative example: a firm is responsible for compensating persons injured by supplying a defective product, which causes damage to an individual or another firm.

Catastrophic risk is a concentration of strong, positively correlated risk exposures, such as many homes in the same location. A loss that is catastrophic and includes a large number of exposures in a single location is considered a nonaccidental risk. All homes in the path will be damaged or destroyed when a flood occurs.

As such the flood impacts a large number of exposures, and as such, all these exposures are subject to what is called a fundamental risk Risks that are pervasive to and affect the whole economy, as opposed to accidental risk for an individual. Generally these types of risks are too pervasive to be undertaken by insurers and affect the whole economy as opposed to accidental risk for an individual. Too many people or properties may be hurt or damaged in one location at once and the insurer needs to worry about its own solvency.

Hurricanes in Florida and the southern and eastern shores of the United States, floods in the Midwestern states, earthquakes in the western states, and terrorism attacks are the types of loss exposures that are associated with fundamental risk.

Fundamental risks are generally systemic and nondiversifiable. Figure 1. Many pure risks arise due to accidental causes of loss, not due to man-made or intentional ones such as making a bad investment. As opposed to fundamental losses, noncatastrophic accidental losses, such as those caused by fires, are considered particular risks. Often, when the potential losses are reasonably bounded, a risk-transfer mechanism, such as insurance, can be used to handle the financial consequences.

In summary, exposures are units that are exposed to possible losses. They can be people, businesses, properties, and nations that are at risk of experiencing losses. Another possible categorization of exposures is as follows:. Pure and speculative risks are not the only way one might dichotomize risks. Another breakdown is between catastrophic risks, such as flood and hurricanes, as opposed to accidental losses such as those caused by accidents such as fires.

Another differentiation is by systemic or nondiversifiable risks, as opposed to idiosyncratic or diversifiable risks; this is explained below. As noted above, another important dichotomy risk professionals use is between diversifiable and nondiversifiable risk. Diversifiable risks Risks whose adverse consequences can be mitigated simply by having a well-diversified portfolio of risk exposures. For example, having some factories located in nonearthquake areas or hotels placed in numerous locations in the United States diversifies the risk.

If one property is damaged, the others are not subject to the same geographical phenomenon causing the risks. A large number of relatively homogeneous independent exposure units pooled together in a portfolio can make the average, or per exposure, unit loss much more predictable, and since these exposure units are independent of each other, the per-unit consequences of the risk can then be significantly reduced, sometimes to the point of being ignorable.

These will be further explored in a later chapter about the tools to mitigate risks. Diversification is the core of the modern portfolio theory in finance and in insurance. Risks, which are idiosyncratic Risks viewed as being amenable to having their financial consequences reduced or eliminated by holding a well-diversified portfolio.

Systemic risks that are shared by all, on the other hand, such as global warming, or movements of the entire economy such as that precipitated by the credit crisis of fall , are considered nondiversifiable. Every asset or exposure in the portfolio is affected. The negative effect does not go away by having more elements in the portfolio. This will be discussed in detail below and in later chapters. The field of risk management deals with both diversifiable and nondiversifiable risks.

As the events of September have shown, contrary to some interpretations of financial theory, the idiosyncratic risks of some banks could not always be diversified away. These risks have shown they have the ability to come back to bite and poison the entire enterprise and others associated with them. Many of them are self explanatory, but the most important distinction is whether the risk is unique or idiosyncratic to a firm or not. For example, the reputation of a firm is unique to the firm.

On the other hand, market risk, such as devaluation of the dollar is systemic risk for all firms in the export or import businesses. In Table 1. The examples are not complete and the student is invited to add as many examples as desired. As discussed above, the opportunities in the risks and the fear of losses encompass the holistic risk or the enterprise risk of an entity.

The following is an example of the enterprise risks of life insurers in a map in Figure 1. Etti G. Baranoff and Thomas W. Since enterprise risk management is a key current concept today, the enterprise risk map of life insurers is offered here as an example. Operational risks include public relations risks, environmental risks, and several others not detailed in the map in Figure 1. Because operational risks are so important, they usually include a long list of risks from employment risks to the operations of hardware and software for information systems.

Our great successes in innovation are also at the heart of the greatest risks of our lives. An ongoing concern is the electronic risk e-risk generated by the extensive use of computers, e-commerce, and the Internet. These risks are extensive and the exposures are becoming more defined. The box Note 1. Electronic risk, or e-risk, comes in many forms.

Like any property, computers are vulnerable to theft and employee damage accidental or malicious. Certain components are susceptible to harm from magnetic or electrical disturbance or extremes of temperature and humidity. More important than replaceable hardware or software is the data they store; theft of proprietary information costs companies billions of dollars.

Companies that use the Internet commercially—who create and post content or sell services or merchandise—must follow the laws and regulations that traditional businesses do and are exposed to the same risks. An online newsletter or e-zine can be sued for libel, defamation, invasion of privacy, or misappropriation e. Web site owners and companies conducting business over the Internet have three major exposures to protect: intellectual property copyrights, patents, trade secrets ; security against viruses and hackers ; and business continuity in case of system crashes.

All of these losses are covered by insurance, right? Some coverage is provided through commercial property and liability policies, but traditional insurance policies were not designed to include e-risks. In fact, standard policies specifically exclude digital risks or provide minimal coverage. Commercial property policies cover physical damage to tangible assets—and computer data, software, programs, and networks are generally not counted as tangible property.

This coverage gap can be bridged either by buying a rider or supplemental coverage to the traditional policies or by purchasing special e-risk or e-commerce coverage. An increasing number of insurers are offering e-commerce liability policies that offer protection in case the insured is sued for spreading a computer virus, infringing on property or intellectual rights, invading privacy, and so forth.

They are preparing for it as the world evolves faster around cyberspace, evidenced by record-breaking online sales during the Christmas season. Today, there is no media that is not discussing the risks that brought us to the calamity we are enduring during our current financial crisis.

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