Risks | Classification of Risk | Types of Risk| Insurance law

Risks | Classification of Risk | Types of Risk| Insurance law

Explain Risk.

Introduction:

In insurance terms, risk is the chance something harmful or unexpected could happen. This might involve the loss, theft, or damage of valuable property and belongings, or it may involve someone being injured.

Insurers assess and price various risks to workout how much they would need to pay out if a policyholder suffered a loss for something covered by the policy. This helps the insurer determine the amount (premium) to charge for insurance.

Types:

There are different types of risk. The most important types of risk include:

1) Pure Risk
2) Speculative Risk
3) Particular Risk
4) Fundamental Risk
5) Static Risk
6) Dynamic Risk

Explain:

1) Pure Risk:

        Pure Risk is a situation that holds out only the possibility of loss or no loss. For example, if you buy a new textbook, you face the prospect of the book being stolen or not being stolen.

Different Types of Pure Risk:

a) Personal Risks
   •Risk of permature death
   •Risk of old age 
   •Risk of sickness
   •Risk of unemployment

b) Property Risks
c)  Liability Risks

2) Speculative Risk:

              Speculative Risk is a situation that holds out the prospects of loss, gain, or no loss no gain (break-even situation). Speculative risks are very common in business undertakings. For example, if you establish a new business, you would make a profit if the business is successful and sustain loss if the business fails.

b) Liability Risk:

            Most people in the society face liability risk. The law imposes on us a duty of care to our neighbour and to ensure that we donot inflict bodly injury on them. If anyone breaches this duty of care, the law would punish him accordingly. For example, if you injure your neighbour or damage his property, the law would impose fines on you and you may have to pay heavy damages.

c) Property Risk:

          Property owners face the risk of having their property stolen, damaged or destroyed by various causes. A property may suffer direct loss, indirect loss, losses arising from extra expenses of maintaining the property or losses brought about by natural disasters.
Natural disasters such as flood, earthquake, storm, fire etc can bring about enormous property losses as well as taking several human lives. The occurance of any of these disasters can seriously undermine the financial security of the affected individual, particularly if such properties are not un secured.

Direct loss:
     Direct loss is that loss which flows directly from the unsecured peril. For example, if you insure your house against fire, and the house is evwntually destroyed by fire, then the physical damage to the property is known as direct loss.

Indirect loss:
       Indirect or consequential loss is a loss that arises because of a prior occurance of another loss. Indirect loss flows directly from an earlier loss suffered. The loss is the consequence of some other loss. It rises as an additional loss to the initial loss suffered. For example, if a factory that has a fire policy suffers a fire damage, some physical properties like building, machinery maybe destroyed. The loss of these properties flows directly from the insured peril(fire). The physical damage to the properties is known as direct fire loss.

2) Fundamental Risk:

              A fundamental risk is a risk which is non-discriminatory in its attack and effect. It is impersonal both in origin and consequence. It is essentially, a group risk caused by such phenomena like bad economy, inflation, unemployment, war, political instability, changing customs, flood, draught, earthquake, wheather(e.g. harmattan) typhoon, tidal waves etc.

3) Particular Risk:

             A particular risk is a risk that affects only an individual and not everybody in the community. The incidence of a particular risk falls on the particular individual affected. Particular risk has its origin in individual events and its impact is localized(felt locally).

4) Static Risk:

         Static losses involve desruction of assests or change in their possesssion as a result of dishonesty. Static losses seem to appear periodically and as a result of these they are generally predictable. Because of their relative predictability, static risks are more easily taken care of, by insurance cover then are dynamic risks. Example of static risk include theft, arson assassination and bad weather. Static risks are pure risks.

5) Dynamic Risk:

          Dynamic risk is risks brought about by changes in the economy. Changes in price level  income, tastes of consumers, technology etc (which is examples of dynamic risk) can bring about financial losses to members of the economy. Generally, dynamic risks are the result of adjustments to misallocation of resources. In the long run, dynamic risks are beneficial to the society.