3. Select the best techniques (not just insurance, but a variety)
4. Implement the techniques
5. Monitor the risk management program
5 Components of the Cost of Risk
1. Expected loss
2. Cost of loss financing
3. Cost of loss control
4. Internal risk reduction (diversification)
5. Residual uncertainty
Physical Hazard
a hazard in which a physical condition (such as speeding) can increase the severity or probability of a loss
Ex-ante Moral hazard
(aka morale hazard)
action or attitudinal change occurs before the loss; refers to the (lack of) incentive for insureds to reduce activity that affects the likelihood of insurance claims
Ex-post Moral Hazard
action or attitudinal change occurs after a loss; refers to the incentive for insureds to choose actions that affect the size of an insurance claim, given that the loss has already occurred
Moral Hazard
attitude or behavioral change; refers to the situation where an insurance policy affects an insured’s incentive to reduce insurable losses