Classification of Risks
Risks can be classified according to their origin and consequences.
Pure Risks are associated with uncertainties which may cause loss. In a pure risk situation, either a loss occurs or no loss occurs – there is no possibility for gain. These uncertainties may be due to perils such as fire, floods, etc or may arise from human action such as theft, accident etc. There are different types of Pure Risks :
- Personal Risks These include early death, sudden accident and disability, unemployment, etc.
- Property Risks Reduction in value of assets due to physical damage, fire, theft, etc.
- Liability Risks The risk of legal liability for damages accruing to costumer, suppliers. Venders, etc. Such risks are also connected with compensation payable to employees for injuries and other harm afflicted in the workplace.
These situations all come under the category of pure risks and are insurable.
Speculative Risks have three possible outcomes: loss , no loss or gain. Examples of such risks include the decision to invest in some shares etc.The statistical techniques used in insurance cannot be applied to speculative risks. Further, these risks are deliberately taken with the hope of gain. Generally, speculative risks are not considered insurable
Fundamental Risks are impersonal in nature. They are present in nature and the economy, and are beyond the control of man. Their effect is pervasive and usually impacts a large group of people. Earthquakes, war, inflation, mass unemployment, etc., are examples of such fundamental risks. Generally, these risks are not insurable and it is left to the Government to deal with the effects of these events. However, in situations where the occurrences are irregular and the impact in minimal, the insurers can venture to insure these risks.
Particular Risks have their origin in individual events which can be partially controlled. They occur due to the action of the individuals, for example, Meeting with an accident while crossing the road. These risks are insurable with conditions.
RISKS may arise due to changes in the economy like fluctuations in price levels, consumer references, distribution of income, product development, shifts in technology, etc. These are called DYNAMIC RISKS.As they are less predictable, generally, they are not insurable.
Risks which occur even with no changes in the economy are classified as STATIC RISKS. These include losses due to perils like fire, theft and dishonesty of individuals. Over a period of time, a certain regularity may be observed in these occurrences and they may become predictable. Such static Risks are more insurable than Dynamic Risks.
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