Doing business in the insurance sector is a risky subject. To be precise we can classify them into three types. They are 1. Financial and Non Financial Risks 2. Pure & Speculative Risks 3. Fundamental & Particular Risks. So in this article, we will be discussing the type of risks that we may face in insurance.
Let’s dive straight in!
3 Types of Risk in Insurance
So, let’s start knowing the 3 major types of risks in insurance.
#1: Financial and Non Financial Risks
This is a type of risk where you can measure the outcome in terms of money. In this type of risk, we can calculate the loss and we can give an exact amount of the loss. The following examples will give you an idea about the Financial Risks.
Damage of property due to an event. Like due to cyclone your boat capsized. You will face a certain amount of loss. You can calculate the value of the boat by deducting the depreciation. Similarly, your car met an accident. You can calculate the damages in monetary terms.
If a thief stole your cash, motorcycle, car, or household item. In this case, you are able to calculate the loss.
Because of fire, there is a loss of property in your business. Your machinery and stocks are material items. So you can easily calculate the loss.
Injuries because of an accident need medical assistance. You can easily find out the cost of your medical treatment.
If the sole bread earner of the house dies then the family faces hardship.
You can measure this type of loss in terms of m0ney. This type of loss is insurable. You can replace your car, reinstall your plant machinery, and buy a new boat. If you are the sole bread earner and you have life insurance then your family will not face hardship after you die. We can call these types of risk in insurance as financial risks or insurable risks.
Non-Financial risks are such types of risks where you cannot measure the loss in terms of money. This type of risk comes from wrong choices or bad decisions. It creates a mental discomfort that you cannot calculate money wise. They are like:
You bought a car. Now you don’t like the color of the car, or you now like a different brand of car which is providing better performance at the same price. Thinking about it gives you mental agony but you cannot calculate it.
Career selection is a tough job. If you don’t select your career properly it will give you lifetime disappointment.
The selection of a perfect bride/bridegroom is the most important part of marriage. If you end up in a bad marriage it will give you embarrassment.
These types of risks cannot be valued in monetary terms, so they are uninsurable.
#2: Pure Risk and Speculative Risks
The next type of risk in insurance is pure risk and speculative risks. We call those risks as a pure risk in which the outcome always ends up in loss or at the max a no loss no profit situation. There is no chance of gain at all. In pure risk, the result is not on your side. There is always a chance of loss or it can end up giving you nothing. Like no loss no profit. That is the most you can get from these types of risks.
On the other hand, speculative ones are those kinds of risks where profit is probable. You can gain in this type of risk but you cannot lose anything.
Let us take an example. Suppose you are the owner of a company which makes soap. Both types of risks are present in its operation. We have pure risk and we also have speculative risk.
There is a certain kind of risk involved when you are running a company. They are:
- Damages of property due to natural calamity like cyclones, earthquakes, etc.
- There could be a loss of stocks due to fire.
- Your machinery can breakdown.
- There can be theft. It can result in loss.
- Someone injures himself while performing his duty.
Also, there are:
- The pricing factor to stay in the market
- The change in the approach or product usage. Like you are making bar soap and people start using liquid soap.
- Sometimes you have to sell your product in credit to the wholesaler.
The first group of examples is an example of pure risk. Here you can calculate the losses. You can insure yourself from such type of incidents.
In the second example, you cannot calculate the losses. Although it can affect your business you cannot insure yourself from such type of events.
#3: Fundamental Risk and Particular Risks
The last type of risk in insurance is a fundamental and particular risk. These generally occur from natural events. They are not in the hand of individuals or groups of people. These type of risks affects many. Losses in these types of risks are huge. Let us give you some examples. They are:
- Landslide, Cyclone, Flood
- Earthquake, Tsunami,
- Volcanic eruption and other natural calamities,
- Draught, Famine
- War, riots, terrorist activities where the losses are colossal.
In this type of situation, it becomes a responsibility of the state to take the necessary step and do the needful. The losses are huge and colossal so it becomes a duty of the state. But due to demand, some insurers are now ensuring these types of risks.
Particular risks are just the opposite of fundamental risk. These type of cases involves an individual or a group of them. The losses are small in magnitude. We can insure these types of risks. The cause of these risks is mainly negligence, misjudgment, and disobeying of law or disregarding respect.
Some situations are:
- Explosion, Fire due to negligence
- Happening of theft
- Death due to rash driving
So these are the types of risks in insurance. Take advice from your insurance advisor if the policy that you are taking covers all the risks. Ask your agent about it. Clear all your doubts before choosing the policy. there are different types of insurance companies available in the market. Each of them offers different types of facilities. So shop around. Choose the policy that suits you better. Don’t make an impulsive decision. Read all the clauses first. If you are satisfied then take the decision. If you like this article like and share it. For further information ask your question in the comment box.