Every type of business or investment brings some pros and cons. Be it starting your venture or investing in the stock or an already existing enterprise. We cannot plunge into the idea of risk-less opportunities. We have to pay something to earn a more significant thing. The same is the case with the insurance industry. Insurance is a type of investment in which you give in some amount of your money regularly and under certain conditions. Later on, when the unfortunate event for which you invested that money happens, the insurance company gives you a promised amount of money. That might be equal to the capital you financed or more than that (depending upon terms).
Hence, there are also some evident types of risks in the insurance industry that people insure against any future calamity that might be possible. A person should be well aware of them before diving into the world of the insurance industry.
What Is the Meaning of Risks in Insurance?
Risk in insurance or risk insurance is any probability where a person’s property or a person himself is hurt or injured. The person who has insured you (insurer) checks the level of the risk of injury to the person. It can also be his property. The person who suffers the loss is the policyholder, and the insurer shall pay the amount of loss that the policyholder suffered.
There are different types of risks in insurance. These risks are analyzed, and the premium plan is made according to each of them. There are both insurable and non-insurable risks. Insurable risks are those risks for which insurance is provided to alleviate the effect of loss. For a better understanding of these risks, we should dig deeper and get into the explanations.
Types of Insurable Risks
Pure or Absolute Risk
It is the kind of risk in which there is no profit for the insured person or policyholder. This risk is totally out of the control of the person, and when it is destined to happen, it will. The term inevitable is used for these types of risks. These are insurable risks, and to be honest, insurance is the only option to mitigate the effect of loss that occurred. The insurance companies do not take responsibility for the whole loss. Instead, they pay a part of the loss to the insured person.
Static Risk
This risk is opposite to pure risk and can be avoided with due care. It occurs due to negligence by the policyholder. It is also due to voluntary actions that can harm the person financially or physically in the future. These voluntary actions can also include offensive or criminal acts done by the person. These sorts of risks are also insurable since the amount of the loss can easily be identified.
Particular or Personal Risk
These are the most highlighted types of risks in insurance. Here the decision of one person or action of a person affects the whole community or group around him. It may be due to negligence of a person or due to the voluntary decision of a person. However, the people suffer loss solely because of the choice or mistake of another person. These risks are insurable because they are against uncertain future calamity. For example, due to the negligence of a bus driver, the whole bus may fall into an accident.
Fundamental Risk
The impersonal risks are also called fundamental risks. They do not affect a single individual only. Instead, the whole community or group is affected. The cause may be natural, social, or political events. No one can avoid these risks hence are inevitable. They affect society on a bigger scale, with permanent effects. For example, famine can affect the health of the whole society. They are insurable. Insurers provide policymakers with the amount they need until they get better again.
Financial Risk
These types of risks are of monetary value, and insurers can calculate them in terms of money. Hence, they are insurable. These are general risks that are unforeseeable, like loss of jewelry, any theft, or accidents occurred on roads. Their monetary values are estimated according to the market’s values, and the policyholder is more or less adjusted with the estimated amount. If the policyholder dies, his legal representatives are provided with the money.
Types of Uninsurable Risks
Speculative Risk
We can call this risk a regular business decision. In a business, we are 80% of the time not sure about the outcomes. Some decisions lead us to profit and some to losses. These risks are risks of getting a bad result of choices. These risks are not insurable since they are a part of the business. A person makes them with a sound mind and after taking total responsibility. For example, a person invests in some shares in a company, and the company faces losses. The insurance companies are not responsible for these bound-to-happen mishaps.
Non-financial Risk
As the name indicates, these risks are not related to money. These risks cannot be insured, because they have no monetary value. They are a mere choice of a person that turns out to be wrong. The damage cannot even be measured by the policyholder himself while deciding with a sound mind. It is just a result of fate and choice.
Dynamic Risk
Dynamic risks are risks that are not effectively unsurprising. They are caused by the progressions that happen in the economy and modify the lifestyle of people. These risks might cause monetary misfortunes for the people. These risks are not effectively insurable.
Conclusion
Insurance plans are beneficial in the long term if the person can save a sufficient amount of money. A person can worry less about the uncertain future. You can choose a plan according to your resources and types of risks. There are many options available that can save you a migraine or a lifetime loss. Just gain the knowledge first before taking this step. Having proper awareness of insurance companies and policies may help you a lot.
Matthew is a Co-Founder at BusinessFinanceArticles.org. Matthew was a floor manager at a local restaurant in Wales. He lost his job after the pandemic and took initiative to make a team and start the project.
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