What is Risk ?
Risk is the possibility of damage, injury, or loss caused by external or internal events. There are two types of risk: pure and speculative.
Pure risk involves only the possibility of loss.
Examples of pure risk include the following:
- Visiting a friend in the hospital—exposure to bacteria or viruses.
- Intramural sports—an activity that may result in injury.
- Owning real estate—potential for a casualty loss or liability claim.
Speculative risk involves the possibility of loss or gain, like the stock market or gambling. Some types of risk can be mitigated through insurance. Speculative risk is not insurable, however.
Risk is also evaluated on an economic scale, comparing static and dynamic risk.
Static risk is the economic loss that is caused by factors other than a change in the economy (natural disasters)
Dynamic risk is the result of the economy changing (changes in the business cycle). Dynamic risks are not insurable.
Is Risk Insurable?
The loss produced by the risk should be reasonably predictable by the presence of a sufficiently large number of homogeneous exposure units.
- The loss must be definite and measurable.
• The loss must be fortuitous or accidental.
• The loss must not be catastrophic to the insurance company.