Written by Everything we do in this life involves one form of risk or the other.
Risk is the center of life and the effect of risk spans various walks of life.
Risk can be defined as the possibility of the occurrence of an unfortunate situation.
It is the uncertainty as to the occurrence of an economic loss.
Risk also refers to the uncertainty that the outcome of an event will vary from the expected.
It is the possibility of occurrence of loss.
During a lifetime, an individual can be exposed to many risks, such as accidents, premature death, illness, and unemployment.
Types Of Risk
1. Speculative risk: This is a risk where there is a possibility of loss or gain.
Speculative risk arises when an action could result in beneficial or adverse consequences.
An example of speculative risk is the risk of gambling on a horse race because you could either win or lose.
Another example of speculative risk is the risk associated with buying stocks on the stock exchange.
Because they are deliberate decisions made with the intention of profiting and are not unintentional, speculative risks are typically not insurable.
2. Pure risk: This is a risk where there is a possibility of loss or no loss.
In pure risk, there is no possibility of gain.
Pure risk essentially means that the occurrence or nonoccurrence of the loss is the only outcome possible.
Examples of pure risk are shipwreck, theft, and fire risk
Please note that pure risks are insurable.
Pure risk can be divided into three categories, namely; personal risk, property risk, and liability risk.
- Personal risk: Personal risk is a risk that a person bears and that has an impact on that person. Personal risk directly affects an individual. Personal risks include things like early premature death, unemployment, illness, and bankruptcy.
- Property risk: This is the possibility of a loss of property or assets. Property risk is the risk of having your property destroyed or damaged due to various reasons. Property risks include things like loss or damage of property resulting from theft, flooding, and fires.
- Liability risk: This is a loss arising from injury or damage to another person. It is the risk of being legally bound to pay for damage to a person or property of another person.
3. Particular risks: These are risks that result from the action of an individual.
Particular risks are personal in origin and consequence because their cause and effects are personal to the person who cause them.
For example, your decision to own a car is affected comes with its own risk, which would affect you personally if the risk materializes.
For instance, purchasing a car carries certain risks that, if they materialize, would affect you personally.
It is important to note that particular risks are insurable.
4. Fundamental risk: This type of risk affect society as a whole.
Fundamental risks do not arise from the action of anyone.
Hence, they are impersonal in origin and consequence.
Fundamental risk arises out of the natural workings of society.
Examples of fundamental risk are risk arising from political instability, earthquake, flood, war, and Inflation.
Fundamental risks are largely uninsurable because they are usually catastrophic in nature.
Risk and Chance
Although the word “risk” and “Chance” are often used interchangeably, they do not exactly mean the same thing.
The word ‘Chance’ is typically used to describe situations where the outcome is favorable.
For example, it is very rare to hear people talk of the “risk of winning a bet”, but it is common to hear people talk of “chances of winning a bet”.
On the other side, the term ‘risk’ is typically used to describe situations where the outcome is unfavorable.
For example, it is very common for people to talk about “the risk of an accident happening”, but is very uncommon for people to talk about the “chance of an accident happening”.
So, the difference between risk and Chance is that risk is usually used for events where the outcome of event is unfavorable whereas chance is usually for those outcome that are favorable.
Risk and Uncertainty
The word ‘uncertainty’ often appears whenever the risk is being discussed, although these two are not synonymous.
Risk means that the likelihood of the occurrence of loss is known whereas uncertainty means the future outcome is not known at all.
Whenever the chance of outcome is known, then there is a risk. If the chance of the outcome is unknown, then there is uncertainty.
