Definition of Risk in Insurance
Risk in insurance can be referred to as the possibility or chance that any unexpected event or events will occur leading to the loss of life or loss or damage to any property of the person who takes insurance by paying the insurance premium calculated by the insurers on the basis of the probability of an event and its impact.
The risk is any event or happening that is not planned by anyone but if it actually happens then it eventually causes life or financial loss to any person. The risk is neither certain nor predictable. In case of risk insurance or risk in insurance, insurers assess the policy taken by the policyholder and pays the sum of money (financial value of damages caused) based on terms and conditions covered in the policy to compensate the loss suffered by the policyholder.
Types of Risk in Insurance
The different types of risk in insurance are as follows:
- Financial Risk: Financial risk is such risk whose monetary value of a loss on the happening of a certain event can be measured. The assessment of loss can be carried out and thus proper monetary value associated with it can be given in respect of such losses. We can take for example the loss associated because of material damage to the property upon the happening of an event. These risks can be insured and are therefore the core subject while doing insurance.
- Non Financial Risk: Non-financial risk is such risk whose monetary value of a loss on the happening of a certain event cannot be measured. The assessment of loss is practically not feasible and thus one cannot measure the same in monetary terms. There may be the situation of a wrong decision or wrong choice resulting in probable disliking or discomfort or embarrassment which could not be measured in monetary terms. This risk cannot be insured. An example of non-financial risk is the wrong selection of the type of mobile phone.
- Speculative Risk: Speculative risk is the uncertainty in respect of an event that is being considered and the happening or non-happening of such event would lead in either profit or loss. This type of risk is generally not insurable. An example of this type of risk is the purchase of the call option of any stock. The price of the option will depend upon the movement of the stock associated with it and the time to expiry of the contract.
- Pure Risk: Pure risk is the risk associated in the happening of any event which would lead to either loss to the person or may end up in the break-even situation. It will not lead to profit in any circumstances. These types of risks are insurable and are non-controllable. This type of risk generally arises in the situation of natural calamity, fire, etc. Upon happening of any natural calamity it would not in any circumstances end up in a situation generating profits because of such calamity.
- Fundamental Risk: Fundamental risk is the risk that is intrinsic to the state of being or it may be an absolute hazard and thus producing no such uncertainty pertaining to the loss. The happening of such an event is not under the control of any person. The origin of this type of risk is on an individual level and its impact can be felt at a localized level as well. We can take for example the event of an accident on a bus.
- Static Risk: Static risk can be referred to as the risk that does not involve losses caused by changes in the business environment and remains constant over the time period i.e., they are the risks that are associated with the losses that would be caused in the unchanging economy. It is mainly caused by any unexpected natural event or destructive human behavior. For example, the risk that damage will be caused due to heavy rains is covered under the static risk.
- Dynamic Risk: Dynamic risk can be referred to as the risks that are associated with the losses that would be caused in the unchanging economy. It has affect on a large number of individuals as it does not occur regularly. For example, the risk that loss will be caused due to change in the technology is covered under the dynamic risk
- Particular Risk: Particular risk can be referred to as the risks that have affect only on an individual & not on everyone in the community. For example, if any of the asset of a person is stolen, the incidence of loss falls on that person only and not on anyone else. Thus risks are the responsibility of the individual person, and not of the society as a whole.
Risk In Insurance and Its Transfer
It is preferred that any risk that an entity or an individual do not want to bear by themselves is to be passed on or transferred to the other entity. This process of transferring the risk is known as the insurance where the transferor of risk is known as the insured and the transferee party in known as the insurer. For the transfer of risk, the person pays an agreed amount known as the premium and in exchange, the insurer agrees for indemnifying the insured against losses that could result from the specified perils. In short in the cases when any person feels unsecured & wishes to get such risk secured by paying a certain amount of money (premium) is known as the transfer of risk in insurance.
Thus, risk in insurance is the risk that any unexpected event if happens will cause loss of life or financial loss to any property. If any person is not willing to bear such risk and wants to transfer the same, then such transfer is possible by taking the insurance policy. In the case of insurance, the insurer agrees to undertake the risk of a person in exchange of a certain amount of premium which is calculated on the basis nature of risk and its impact. In case such an unexpected event happens and causes loss to the insured person, then the insurer has to pay the amount of loss incurred based on terms of an insurance policy.
This is a guide to Risk in Insurance. Here we also discuss the definition and risk in insurance and its transfer along with different types. You may also have a look at the following articles to learn more –