Risk Homework 1

Homework Assignment 1

September 10, 2012

1. “Facebook Photos Doom Workers’ Comp Claim...”

a. With a pure risk you have three situations: Chance of loss, chance of no loss, and no chance of gain. With Workers Compensation, an employee may be injured while on the job or may never incur a job injury. The insured, Mr. Clements would never receive a gain from either “Chance of loss” or “Chance of no loss” occurring. In other words the pure risk in this situation from the point of view of Mr. Clements is that he could either suffered a legitimate injury while working at a Johnson’s Warehouse Showroom or not. Only pure risks are insurable because otherwise (where the chance of the occurrence of a loss is determinable).

b. The loss in this situation, from Mr. Clements point of view, is the settling workers’ compensation claims, such as medical bills and salary reimbursements.

c. The peril in this situation is the refrigerator that fell onto Mr. Clements.

d. The type of hazard that is illustrated here is Moral Hazard. This is the risk that the presence of a contract will affect the behavior of one or more parties, in this case Mr. Clements. This classic example is in the insurance industry, where coverage against a loss might increase the risk-taking behavior of the insured and collect non-working benefits. I’m sure Mr. Clements was a nice guy but insurance money changes people and causes them to do stupid things.

e. Moral Hazard is considered to be an example of a hazard in general because it is a situation where a party will have a tendency to take risks, which can be a hazard because the costs that could happen will not be felt by the party taking the risk, in this case Mr. Clements.

2. “Penn State’s Legal Liability in the Sandusky…..”

f. One element of the cost of risk being illustrated in this article is the financial cost to Penn State. 14 Years and the multiple acts of sexual abuse, the university’s exposure...