Types of Risks
To illustrate the difference between the two types of risk let us take the example of a property owner. When a person purchases a property, he is exposed to the risk of damage or loss to his property due to fire. In the event of a fire occurring he will suffer a loss and there is no possibility of him gaining anything if a fire occurs.
Simultaneously the value of his property may increase or decrease due to various factors. The areas where the property is located may develop into a prime locality and the value of his property will increase or alternatively the area may not develop but instead becomes uninhabitable because of pollution and the value of his property may decrease. Thus by purchasing the property he exposes himself to the risks of either gaining or losing.
In the first case there was only the chance of a loss occurring this is known as pure risks whereas in the second there is a chance of either gain or loss this is known as speculative risk. Thus we see that in the same instance i.e. the purchasing of a property the owner exposes himself to both Pure and speculative risk.
Pure risks are those where in case of any unexpected happening the result is only loss whereas in speculative risks an unexpected occurrence can possibly result in gain or loss.
When a person gambles or he buys shares there is a chance that he may lose or win or that the share prices may go up and he gains or the share market crashes and he loses. These are speculative risks. Risks as we have mentioned earlier is the possibility of loss but when there is also a chance of gain then these risks are called speculative risks.
It is said that the profit that a businessman earns is his reward for bearing a speculative risk. No businessman willingly exposes himself to pure risk because in pure risk there is no gain. It is a universal fact that if one has to live in this risk prone world, one has to expose himself to the pure risks. Pure risks are a part of the environment and are all pervading.
Pure risks which every individual families, firms and other organisations are exposed to can be broadly classified as follows:
- Personal Risk: Since all losses are ultimately borne by the people it can be said that all risks are personal but there are some losses such as loss of income, mental or physical suffering etc. which have a direct impact on people. Therefore the risk of premature death, sickness, disability, unemployment and even dependent old age are put in this category of Personal risk.
- Property Risk: The possibility of loss to an asset such as damage to a building due to fire or damage to a vehicle in an accident or theft of vehicle. These sort of risks fill in the category of Property Risk.
- Liability Risk: This is the risk of becoming legally bound to compensate or to pay for damage to the person or property of others.
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