Sunday, September 27, 2009

Basic Categories of Risk


Risk is the chance of something’s going wrong. It may be the danger of occurrence job injury, damage or loss. Risk can be classified into major two categories as given below:

1.    Pure and speculative risks

a.    Pure risk

Pure risk:  Pure risk is defined as a situation in which there are only the possibilities of loss or no loss. The only possible outcomes are loss or no loss. For example job-related accidents, damage to property from fire, lighting, flood, earthquake, or pre-mature death. In these situations, only loss or no loss is possible.

b. Speculative risks

A speculative risk is defined as a situation in which either profit or loss is possible. For example, investment in real estate. If you purchase land of one hectare, you will get profit if the price of the land increase, but will lose if the price declines. Other examples of speculative risks include purchase of share, betting on a horse race and going into business for you. In these situations, both profit and loss are possible.

It is important to distinguish between pure and speculative risks for the sake of insurance. The basic three reasons of such distinction are Insurance generally insure only pure risks, generally, speculative risks are not considered insurable.

The law of large number can be applied more easily to pure risks than to speculative risks. The law of large number is important because it enables insurers to predict future loss experiences. In contrast it is generally more difficult to apply the law of large number to speculative risks to predict future loss experiences.

A pure risk is harmful to society. Such risk is better to avoid by any means. Society normally does not benefit when a loss from pure risk occurs, such as a flood or earthquake that devastates an area. But there may be a benefit to society from a speculative even through a loss occurs. In this case. The loss from speculative risk of somebody may become the profit of another body. For example, innovation of computer and producing in cheap price may result bankruptcy to the typewriter manufactures.  Despite the bankrupted society benefits because the computers are very useful in office and daily life. 

2. Fundamental and particular Risks


a. Fundamental risk: The risk affecting the entire economy is known as fundamental risk. It is a risk that affects large number of people within the economy. It is social risk rather then individual risk. For example, inflation, war cyclical unemployment affects a large number of individuals, similarly, natural disaster such as earthquake, floods; tornadoes are also fundamental risks in society. The fundamental risks are very harmful to society. They may result large property damage and numerous deaths. Recently, Nepal is suffering large loss of property and human lives form floods every year. It is a good example of fundamental risks.

The terrorist attack is also a fundamental risk recently increasing rapidly all over the country. Many countries including countries of south Asia have experienced substantial increase in terrorism in recent year, resulting in substantial property damage and the loss of human lives, the terrorist attack in the United States on September 11, 20001, resulted in the loss of four commercial jet planes, destruction of the world Trade Center towers, substantial damage to the Pentagon and thousands of deads. In fundamental risks the whole society or economy experiences the losses. Not only the individual. 

b.    Particular risks: The risks affecting only individuals is known as particular
Risks. Particular risks do not affect the entire community. It is personal        risk rather than social risk. For example, car accident, theft, rubbery, house and store fire. In particular risks. Only particular individuals experiences the losses. Not the whole economy.

The distinction between a fundamental and a particular risk id important to all sectors. Government assistance may be necessary to insure most fundamental risks. Social insurance and government insurance programs as well as government guarantees and subsidies may be essential to insure certain fundamental risks, for example, the risk of unemployment is insured publicly by state unemployment compensation programs. Generally if is not insurable by private insurers. But all type  of particular risk are insurable by private insurance. The principle of insurance is more applicable to the particular risks.




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