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Classification of Risks

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Classification of RisksRisks are classified in various ways. One classified is based on the extent of the damage likely to be caused. Critical or Catastrophic risks are those which may lead to the bankruptcy of the owner. It would happen if the loss is total, like in a tsunami, wiping out everything. It can also happen if the deceased person was heavily in debt. Important risks may not spell doom, but may upset family or business finances badly, requiring a lot of time to cover. The adverse effects of an economic recession are one such. Less damaging are unimportant risks, like temporary illness or accidents.

Another classification is between Financial and Non-financial risks, referred to in an earlier paragraph. Insurance are concerned with only financial risks.

A third classification is between Dynamic and Static risks. Dynamic risks are caused by perils which have national consequence, like inflation, calamities, technology, political upheavals, etc.Static risks are caused by perils which have no consequence on the national economy, like a fire or theft or misappropriation. Dynamic risks are less likely to occur than static risks, but are also less predictable. Static risks are more suited to management through insurance.

Fundamental risks are those that affect large populations while Particular risks affect only specific persons. A train crash is a fundamental risk while a theft is a particular risk. Insurance business deals with personal risks, but fundamental risks affect the life insurance company’s experience, as many people will be affected at the same time, when there is an earthquake, flood or riot.

Another classification is between Pure risks and Speculative risks. The latter are in the nature of being or gambling where the risk is, to some extent, under the control of the person concerned, while a pure risk is not so. It is more in the nature of an Act of God. Insurance deals with only pure risks and not speculative risks.

Next Topic: How Insurance Works

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