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Risk Management for Individuals and Enterprises

v2.1 Etti Baranoff, Patrick Lee Brockett, Yehuda Kahane, and Dalit Baranoff

Chapter 1 Understanding Risk

The revolutionary idea that defines the boundary between modern times and the past is the mastery of risk: the notion that the future is more than a whim of the gods and that men and women are not passive before nature.

The idea that risk can be managed is one of the defining characteristics of modern life. Today, the notion of risk and the possibility of its mitigation are thoroughly embedded into our everyday lives. Whether we are aware of the risks around us or not, we are all beneficiaries of robust risk management. Whether we are aware of the risks around us or not, we are all beneficiaries of robust, if imperfect, risk management. The COVID-19 global pandemic has recently challenged our assumptions about our ability to predict and manage risk. Yet the pandemic has also highlighted the centrality of risk in our lives, reinforcing our need to understand risk if we hope to manage it.

In this text, we focus primarily on risk management tools, both insurance and the financial tools and techniques used by individuals and organizations. Thus the terminology utilized throughout this text is that of risk management, insurance and finance. In this chapter we introduce this vocabulary, beginning with the concept of “risk,” its meaning, and our attitudes toward it. We go on to explore the different ways risk may be categorized and the terms used to distinguish between various risk components.

Today we inhabit a rapidly changing risk landscape, driven by social and technological innovations. Yet we are just beginning to identify the risks emerging from such advances. Social media, the sharing economy,  “the internet of things,” artificial intelligence, big data, and myriad other new technologies all carry potential for risk. In this chapter and throughout this book we show how the risk management concepts presented here are not just applicable to the familiar risks to life, health, property, and liability, but also to new and emerging risks. The COVID-19 pandemic not only represents an unprecedented risk event in its magnitude, but it also it illuminates a heightened global risk environment, in which economic, social, political, environmental, and technological risks are all interconnected.

This chapter contains the following sections:

  1. Links: Introducing the Holistic Risk Puzzle

  2. Defining Risk

  3. Attitudes toward Risks

  4. Types of Risk Exposures

  5. Perils and Hazards