Classification of risks and types of pure risks

Risks can be classified in many ways.

Fundamental vs Particular

Fundamental risk is a type of risk that affects large numbers of people in an economy. Earthquakes and war are examples of that. If it originates from the nature of society, that is, an act of war and the risk of unemployment, then it is not insurable. Meanwhile, fundamental risks resulting from physical or natural causes may be insurable.

On the other hand, the particular risk is a risk that affects only people. For example, fires, robberies and thefts. All these risks are insurable.

Dynamic vs static

Risks can also be classified as dynamic and static. Dynamic risk occurs due to changes in the economy that cause economic losses to certain people. It exists as a result of adjustment to misallocation of resources in the economy. In modern times, one of the clearest examples is the rapid change in the information technology industry. Many companies became victims, while others emerged as new successes.

Static risk, on the other hand, occurs even though no changes are taking place. During the boom or bust of the market, there are people who suffer losses. These types of losses are due to natural hazards such as earthquakes, typhoons or moral hazards such as traps. Static risk does not bring benefits to society, only pure losses.

Pure vs speculative

Risks can also be classified as pure or speculative. At pure risk, there is a possible loss or no loss. On the contrary, there are chances of profit or loss in speculative risk. Pure risk can be insured while speculative risk cannot. However, the pure risk consequences of speculative risk are insurable. For example, the decision to make a new product involves speculative risk, either making a profit on the product or generating a loss. So it is not insurable. But if the factory is burned down and as a result is unable to supply distributors, these losses are considered a pure risk and therefore insurable.

Basically, there are 3 types of pure risks that concern an individual.

Types of pure risks

Personal risks

They incur losses such as loss of income, additional expenses, and property devaluation. There are 4 risk factors that affect this:

1. Premature death. This is the death of a breadwinner who leaves behind financial responsibilities.

2. Old age / retirement. The risk of retiring is not enough savings to sustain your retirement years.

3. Health crisis. People with health problems can face a possible loss of income and increased medical expenses.

4. Unemployment. Unemployed people may have to live off their savings. If your savings run out, the biggest crisis awaits.

Property risks

It means the possibility of damage or loss of the property owned by some causes. There are two types of losses involved.

1. Direct loss, which means a financial loss as a result of property damage.

2. Consequential loss which means financial loss due to direct property loss events.

For example, a store lot that catches fire may incur repair costs as a direct loss. The consequent loss is not being able to run the business to generate income.

Liability risks

A person is legally responsible for his wrongdoing that causes damage to the body, reputation or property of a third party. You can be legally sued and the most horrible thing is that there is no maximum amount of compensation if you are found guilty.

Knowing how risks are classified and the pure types of risks a person is exposed to will surely give you a fundamental foundation on risk issues and prepare you to gain more knowledge on how to manage risk.