Understanding Insurance

1. What is risk?

We use the word “risk” in everyday conversations. “I don’t want to fly with **** air anymore, it’s too risky”, “I just pay, the risk is low”, “What is the risk of not doing this procedure, Doc?”, etc. But, what is risk actually?
From above sample expressions, we can see that the word risk is used to describe or express the possibility or likelihood of something bad or unpleasant to happen. For the likelihood of something good, pleasant and we look forward to, words of “opportunity” or “chance” are normally used.
Understanding insurance must begin with discussing risk. In the context of insurance, risk is defined as “uncertainty of loss”. Loss is any bad or unpleasant event which its consequences, as far as possible, can be measured in financial terms.

Source: Quantlabs.net

Every moment in our life, we are continuously facing risks or uncertainties that something bad may occur. Let’s take the example of a commuter who works in Jakarta but lives in Bogor, about 60km to the south of Jakarta. He has several choices for daily commuting to work. He can drive and carries the risk of being involved in a road accident that could bring damage to his car or injuring his body. He may avoid the risk of road accidents by switching to riding the Commuter Line train, but at the same time he is facing other uncertainties such as train collision, injuries when jostling for entering or exiting trains, or being pick-pocketed.

This reminds me to good old days of school, when we were introduced to law of conservation of energy, to say that energy cannot be completely destroyed or vanished, it only changes from one form to another. It seems that the same principle applies to risk, let’s call it law of conservation of risk. Indeed risk cannot be completely eliminated, it only transform from one type to another depending on the choices we make in doing our activities.

When the Commuter has reached his office that seems to be very safe, he still faces various risks or uncertainties that can bring harm. Starting from the possibility of subtle cuts by sharp edges of paper, slipping on the slippery newly-mopped tiles, splashed with newly-brewed hot americano, stung by electrical shock from a photocopy machine or squeezed by closing elevator doors. He may be caught in a fire on the high floor and desperately plunging through the window or decided to stay but still die of inhaling poisonous thick smoke or even being roasted.

So, many bad things might happen to anyone, any time, anywhere even though the place looks very safe. These possibilities remain uncertainty because we do not have the knowledge of when that will happen and how severe the consequences will be.

So, what should we do then? Worrying all the time so that we are afraid of doing anything? Or, should we just completely ignore them, they are out of our control anyway and leave it to the Almighty to deal with it? Or, is there anything we can do to manage them?

P.S. For Bahasa Indonesia version of this article, click Risiko, apakah itu?

3 thoughts on “1. What is risk?”

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