CATEGORIES OF RISK Flashcards
What are the categories of risk?
- Financial and non-financial risks
- Pure and speculative risks
- Particular and fundamental risks
Financial risks - Insurable? What are they?
Yes - measurable in financial terms.
Example of a financial risk?
Accidental damage to a motor car - The financial value of the risk is the cost of repairing or replacing the vehicle.
Exceptions to insurable risks? Why?
Personal accident and sickness policies - there is no way of valuing precisely the loss of a life or the loss of sight.
Non-financial risks - Insurable? What are they?
No - Incapable of financial measurement
Example of a non-financial risk?
The choice of a marriage partner.
Pure risks - Insurable? What are they?
Yes - Where there is the possibility of a loss but not of gain, and where the best that we can achieve is a break-even situation.
Example of a pure risk?
Risk of machinery breakdown - this could lead to actual damage or business interruption and is measurable in financial terms.
Speculative risks - Insurable? What are they?
No - They are undertaken voluntarily, in the hope that there
will be a gain.
Example of a speculative risk?
National lottery
Particular risks - Insurable? What are they?
Localised or even personal in their cause and effect - cause can be more widespread but event is localised or even related to an individual.
Example of a particular risk?
Theft of personal possessions from a home - An event that only affects an individual or family.
Fundamental risks - Insurable? What are they?
No - rise from a cause outside the control of any one individual or group of individuals and their effects are usually widespread. The loss associated with them is often catastrophic. Such risks may arise out of social, economic, political or natural causes.
3 Examples of fundamental risks?
- Earthquake (in an area not subject to a great loss potential)
- Famine
- War
Where does the real risk arise from with non-financial risks?
Decisions and actions motivated by other considerations
