Types of Risks in Insurance 2020

Types of Risks in Insurance

Types of Risks in Insurance – Let us start by understanding what we mean by risks in this context. In simple terms risk here means danger, peril, hazard, or possibility of loss. We also mean the amount covered by insurance, and that by extension also means a person or object insured. A risk is an event or an occurrence that is not planned but which if it eventually happens, will mean financial or other serious consequences resulting in a loss. There is saying in insurance: ‘higher the risk more the profit.’

A risky proposal can, on one hand, bring higher profits to the insurer if it does not materialize, but on the other hand, looming losses if the event should happen. The risk(s) can never be certain or predicted. Therefore there is a need for proper risk management.

Types of Risks in Insurance
Types of Risks in Insurance

The risk management is just a way of calculating the possibility that the risk may come up sometime in the future. It is not a prediction but a way of trying to reducing the risk to a minimum level. Risk management also involves a number of measures that are taken to keep the risk at a minimum.

Types of Risks in Insurance 2020

  • Speculative Risks
  • Pure Risks
    • Risk of life. (Death)
    • Risk of Health, (Healthcare Insurance)
    • Risk of Injury (Accident Risk)
    • Risk of Industry: (Industrial Risks)
    • Risk of Fire
    • Risk of Theft
    • Risk of Burglary
    • Risk of Travel
    • Business Risk
    • Risk of Freight
    • Marine Insurance
    • Risk of Air-cargo Transport
    • Motor Vehicle Risk
    • Third-Party Motor Vehicle Risk

Read on for more details

In the carrying out of our day to day activities, we also take many steps to keep the risk at a minimum level. For example, most people do not keep money or valuables at home, they would rather prefer to keep them in a bank. They are even happy to pay for a certain locker rent to the bank Despite the cost.

Similarly, risk of life, health or even is reduced by making a better lifestyle choice, including dieting and exercise. We also improve the electrical and cooking systems within our homes in order to make them less susceptible to a fire outbreak. However, despite our best precautionary measures, there is a final line of defense that we must not ignore: Insurance.

The risk to life, health or property is further reduced by purchasing a proper insurance policy. All these actions taken by individual persons, as well as business entities are done with fear of uncertainty and unpredictability of the future. Likewise in business and other aspects of commerce, there is also an element of fear of loss.
Risk is a possibility of the occurrence of something adverse and in order to restrict such adverse occurrences, a plan is put in place to overcome such adverse happenings. Which is called risk management? In the field of Insurance all such fears, uncertainties, prejudgments of possibly forthcoming risks are analyzed and determined by the Actuary put in place by the IRDA.
The first step taken towards covering the risk or fear of risk is to identify the risk. But how is it possible to identify and quantify the risk unless it is known what type of risk it is? This is why it is important Hence it knows the nature of the risk.

Details On The Main Types of Risk In Insurance

Risks can be of endless types but they revolve around two main factors:

  • (i) Pure Risk:

Such risks are purely accidental in nature. Any accident can bring in physical loss and therefore a pure loss can also be called a physical loss that the insured party faces due to the happening of an event against which he has been insured. Physical loss may be of any type: ranging from a loss in business due to a fire breakout-causing loss of stocked goods, or possible damage to other property for any reason.

An accident of any type resulting in a financial loss or even loss of life is some examples of pure risks. All types of physical risks can be hard to be avoided. They may possibly occur due to human negligence or even by natural calamities. Riots, strikes, or even sudden breakdown in a mechanical or electrical unit can also cause an accident or risk. Fall in prices of goods stored, fall in demand for manufactured goods and so many other reasons can contribute to, or cause losses. Business methods and market analysis can try to reduce this risk but It is important to note that the pure risks or risks of trade or business can seldom be avoided but can be insured against.

  • (ii) Speculative Risks:

Such types of risks are always imaginative. Just because they are called imaginative or speculative those not mean they are unfounded: speculation in business brings in profit or loss. Either way, speculations works! Mostly, speculation is made in the field of trade. There may be many un-accounted reasons for the creation of risks in the field of trade, but some of them may be: price rise or fall, inflation, rotting of perishable stock of goods or stagnation of stocks due to strike actions by workers, terrorist threat, declaration of war, depression of the stock market, etc.
By the meaning of the word speculation, one can quickly understand that speculation is a business decision, possibly a purchase or sale of shares or of physical stock or goods, on an estimate of whether the share value or price of product will rise or fall, with intention of making profit or avoiding a loss from such future price movements. Whether the investment is made in shares, land, commodity or money, such investment can rightly be called gambling, and gambling itself is a speculative risk action that cannot be reasonably be relied upon. A gambler can never be 100 percent certain of a win in the position, and profits can never be trusted in the business of gambling.

Both scenarios and examples are risks, however, The difference between the two risks is that the pure risks can be insured against, while speculative risks cannot be insured. Only if for the purpose of identifying the factor and kinds of risk can the above classification be made. The explanation is purely academic and is not practical or operational. It is important that a person has some knowledge about insurance before approaching an insurance agent, broker, or company.

There should be actively advocated a specific limit of identifying risks like Pure risk and speculative risk. Otherwise, If one presumes risk can be a certain risk, uncertain risk, a visual risk and then a un -visual risk, a temporary risk and also a permanent risk and so on, then there is no end to the identifying actual risks. It is, therefore, necessary that the track record of previous happenings that have occurred in every field of life is taken into account in order to analyze and estimate the future risks in any particular field. It could be a risk of life, or of health, of industry, of trading, business, commerce, motor vehicles, home and so on.

The following are Insurance or Insurable risks. They are risks that fall under the first kind of risks, Pure Risks, Real Risks, or Insurable Risks.

  • Risk of life. (Death)
  • Risk of Health, (Healthcare Insurance)
  • Risk of Injury (Accident Risk)
  • Risk of Industry: Industrial Risks (Machines in a factory, apart from the machines getting
  • faulty, The machines can also cause harm or damage to the factory, or to workers, etc)
  • Risk of Fire
  • Risk of Theft
  • Risk of Burglary
  • Risk of Travel
  • Business Risk (This has many sub-sectors, some given below)
  • Risk of Freight (Goods transported by road could get stolen, or lost in an accident)
  • Marine Insurance (Ships can sink, Goods can get lost at sea)
  • Risk of Air-cargo Transport
  • Motor Vehicle Risk (This usually encompasses theft, fire, accidental damage or destruction, etc. )
  • Third-Party Motor Vehicle Risk (Danger of killing or injuring someone with a vehicle, and also damaging someone’s property.)

Transfer of Risks:

Before we understand what it means to transfer of risk we must know the meaning of the word transfer. The meaning of transfer is to move from one place to another place or from one person to another person. It may also mean to convey the property to another or transfer any right or power. The same logic applies to money/shares/liabilities or assets.

When we talk of liabilities, we often mean problems or blame. We see everyone become much more alert as everyone is eager to transfer the blame or the problems (liabilities) to someone else. And what are pecuniary liabilities? This may be a debt due to a bank or other lenders, the liability of paying for health services, the liability of accidental events or otherwise. Every type of liability is considered as a problem or ‘Risk.’

Insurance is a form of risk management. Its primary function is to transfer risks of loss in exchange for payment of a certain amount of money known as a premium. The insurer or insurance company is engaged in the business of selling insurance policies and they can be explained as bonds that transfer the risk or liability from the insured party to them in the event of the occurrence of the event against which the policyholder has been insured.

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