If you have learnt the history, function, and the definition of insurance, then you must have got an idea of insurance and insurance companies. Insurance companies run their business by selling promises to a client in order to transfer part or entirely the risk that he would face in the future.
Definition of Risk in Insurance
Risk is a danger or as a result or consequence that may occur because of a process of ongoing or future events. In the field of insurance, risk is an uncertainty that will always be faced by humanity in the whole activities in their life, whether it is personal activities or business activities. At least, in, there are four types of classification of risks. The risks are classified differently. All of these risks can be explained as follows;
- Pure Risk is one of the risks that lead to two possibilities. First, if this risk occurs, it will cause loss. Second, if the risk does not occur, it will not pose any loss or gain (no loss, no gain). For example; fires, accidents etc.
- Speculative Risk is the risk resulting from betting luck. If this happens then the risk will lead to three possibilities. First, it would give rise to a profit. Second, it will cause loss. Third, do not cause any loss or benefit (Gain, loss or no loss, no gain). For example; gambling, invest a stock, etc.
- Particular Risk is a risk that if it happens, both the cause and consequence only cause a personal effect and do not include losses in quantity and quality. For example; housebreaking, robbing, unemployment, etc.
- Fundamental Risk is a risk that happens because of one particular party such as government policies, natural disasters, and led to a very wide impact.
Hopefully, you have understood the meaning of risk in insurance so you will understand more about how the insurance companies define a risk. This definition is crucial since you can also say that “risk” is the object of “selling” by insurance company.