Types of Risks in Insurance

Introduction

The level of risk differs for everyone as it depends on various activities conducted by the business or person. So, whether you are an individual or organization, you have to learn about the risks linked to your regular dealings. Since risk is something that’s uncertain, knowing how to encounter it upon happening aids you to be a step ahead in the game.

Risks are two types, namely, systematic and unsystematic. The former type of risk cannot be unavoidable, as it’s inherent in nature impacts the entire market on a whole, including geographically and economically. Some of the examples of systematic risk are inflation, corruption, unemployment rate, etc.

The latter type of risk is very specific to a certain unit or sector or industry, and doesn't get affected to other areas of the economy. A simple example of unsystematic risk is a plummet in the stock price of a company due to lack of profits for the financial year.

Likewise, there are various types of risks in insurance, which are discussed further.

What is risk in insurance?

Risk in insurance refers to a loss or unpredictable activity that could result in a loss of a life or non-life thing or asset or anything valuable. Now, irrespective of the severity of the loss, the insurance company has to compensate or reimburse the insured as per the policy rules and guidelines. The loss can be in any form like an accident or sudden fire explosion or natural calamity or any other form of peril that causes injury to the party.

Understanding risks in insurance

The work of insurance is to manage and reduce the severity of risk. Once the policyholder takes insurance, he or she has already transferred a majority of the risk to the insurance company, which is the prime function of taking insurance. The cost of the insurance depends on the coverage he or she’s expecting.

The wider the coverage, the more costly the insurance will be. The policyholder has to pay the premium as per the agreed terms in order to get the risk covered upon any peril activity. If you fail to pay the premium on time, your insurance policy can come to an end.

Some of the factors insurance premium value depends on include age of the policyholder, location, coverage type, previous claims, etc. If the chance of risk occurrence is higher than expected, then the premium will be

Types of risk in insurance

In insurance, risk is grouped into multiple types, each of them are explained in brief below.

• Pure Risk − This is an inevitable risk as one cannot stop this event from happening. Such a type of risk can create a total loss to the party or do nothing. In simple words, the happening of this risk results in loss of a life or witness considerable loss. In some cases, the situation would be break-even, where there would be no profit but certainly loss to be borne.

  For instance, a flood can only submerge the land in the respective area but the loss incurred by the person is less. However, some get drowned during the event but the death count depends on the type of people living in the area (aged or young). This type of risk cannot be avoidable but the damage to the person can be less, depending on the type of calamity event.

• Financial Risk − As the name suggests, the value of risk can be computed in financial terms. Once the loss is identified and measured, the concerned insurance company takes care of the reimbursement for the worth of loss incurred by the policyholder.

• Fundamental Risk − Here, the risk is not caused by any person but totally external. No one is responsible for the occurrence of this event followed by consequences. The severity of the risk doesn’t impact the whole nation but is only limited to an area. For instance, a car accident near your house only affects that area.

• Speculative Risk − One can see this risk mostly in global and share markets, specially traders and investors. For instance, the healthcare industry has never expected a pandemic like COVID is going to change all our lives like never before.

  Speaking in monetary terms, the ones who have invested in the healthcare sector get to benefit more during this period. However, one failure experiment can plummet the share value of that health company, and vice-versa. So, the price of the shares rely on the company and market performance.

• Static Risk − Humans make mistakes too, and as a consequence, they have to bear the repercussions as well. So, this type of risk is caused due to misbehavior and unstable actions of the person.

• Particular Risk − This risk is specific to a person or society at large but not to the total area. If the mobile caught fire while charging, the risk is only targeted to the person. So, only the respective person or society who suffers from the risk have to pay the price for it, and not any external party.

• Non-Financial Risk − This type of risk is just the opposite of financial risk, where here, one cannot showcase the risk value in financial terms. The best example for non-financial risk is shopping for outfits or consumable goods or tech gadgets. One cannot access the true worth of risk in these scenarios.

Conclusion

Risk is inevitable for both individuals and organizations, as it can cause loss to the person or property, either wholly or in part. Now, whatever be the damage, insurance takes care of it by transferring risk from policyholder to the insurance company. These days, almost all sorts of risks and damages are covered by insurance policies.

FAQs

Q1)Name the list of risks in insurance?

Ans)There are numerous risks in insurance such as finance risk, non-financial risk, static risk, speculative risk, fundamental risk, pure risk, etc.