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Classification of Risks

Risk may be classified in the following ways:

(i)    Financial and Non-financial Risks. The term ‘risk’ includes all situations where there is an exposure to adversity. In some cases, this adversity involves financial loss, while in others, it does not. In this text, we are concerned with those risks which involve financial loss.

(ii)    Static and Dynamic Risks. Dynamic risks are those risks which result from changes in the economy. Changes in the price level, consumer tastes, income and output, and technology may cause financial loss to business firms. These dynamic risks normally benefit society over the long run since they are the result of adjustments to miscallocation of resources. Although these dynamic risks may affect a large number of individual, they are generally considered less predictable than static risks since they do not occur with any degree of regularity.

         Static risks involve those losses which would occur even if there were no changes in the economy. These losses would result from sources other than changes in the economy such as the perils of nature and the dishonesty of other individuals. Static losses involve either the destruction of the asset or a change in its possession as a result of dishonesty or human failure. Static losses tend to appear with a degree of regularity over time, and as a result are generally predictable.
(iii)    Fundamental and Particular Risks. Fundamental risks are those which involve losses that are impersonal in origin and consequence. They are group risks caused for the most part by economic, social and political phenomena, although they may also result form physical occurrences. They affect large segments of or even the entire population. Particular risks involve losses which arises out of individual events and which are left by individuals rather than by fundamental risks. The burning of a house or he robbery of a bank are particular risks.
   Since fundamental risks are caused by conditions which are more or less beyond the control of the individuals who suffer the losses and since they are not the fault of anyone in particular, it is held that society rather than the individual has a responsibility to deal with them.

(iv)    Pure and Speculative Risks. The term “pure risk” is used to designate those situations which involve only the chance of loss or no loss. Theft, fire, strike, lockout damage in transit, etc. are the examples of pure risk. The term ‘speculative risk’ denotes those situations which involve not only the possibility of loss, but also of gain. Speculative risks arise in the form of fluctuations in demand and supply, changes in prices, changes in fashion and taste, etc. The entrepreneur faces speculative risk in his quest for profit. The investment made may be lost if the production produced is not accepted by the market at a price sufficient to cover costs.

The distinction between pure risk and speculative risk should be carefully noted. In case of pure risk, an entrepreneur may or may not suffer any loss. Such risk always exists. But their non-happening does not bring extra gain to the business. Such risks generally insurable. On the other hand, a speculative risk is deliberately assumed by an entrepreneur and it may cause loss or bring gain to the entrepreneur. It is due to speculative risks that an entrepreneur is able to earn profits.

Pure risks that exist for individuals or business can be further classified under the following groups:

1.    Personal risks involving the possibility of loss of income or assets as a result of the loss of income earning ability: the risks of (a) premature death, (b) dependent old age; (c) sickness or disability ; and (D) unemployment.

2.    Property risks involving the possibility of loss of property, the use of that property, or income from the property : the risks of (a) direct physical loss or damage to property ; (b) loss of use of the property of income form the property ; and (c) additional expenses caused by the loss of property.

3.    Liability risks involving the possibility of loss present assets or future income as a result of damages assessed or legal liability arising out of either internal or unintentional torts or invasion of the rights of others.

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