What is Risk? And what is Insurable Risk?
By My Insurance Broker
My Insurance Broker
Jun 21st, 2016 at 08:43 am • Richmond Hill, ON
What Risk means:
In simple terms Risk means the chance of loss. Throughout the course of our daily lives we are exposed to many risks. Risk arises in the absence of certainty… or in other words, where uncertainty exists, there is Risk. You Risk your life when driving. You Risk your health when you consume more than you should. Some may even say, you’re taking a Risk by crossing the road. Risk comes in many forms, but all Risk exposes you to the possibility of loss. Two types of Risk are, Speculative Risk and Pure Risk. Which leads to the following questions:
- What is Speculative Risk? And
- What is Pure Risk?
A Speculative Risk means:
Speculative Risk exists where there is a chance of loss and a chance of profit, essentially Risk and reward. Any and all business operations are examples of Speculative Risk. There is a chance that the business will make a profit by being successful and a chance the business will lose money or fail as a result of many factors including economic conditions and the abilities of the organization to successfully conduct business.
A Pure Risk means:
Pure Risk exists when there is a chance of loss but no chance of profit. This is the type of Risk insurance is concerned about dealing with. An example of Pure Risk is the risk of financial loss associated with owning operating a motor vehicle. A driver may get into an accident, suffer injuries, damage the vehicle, or damage a property. These are some of the Risks that may result in financial loss for the driver. In each of these circumstances there is no opportunity or chance of profit as it is insurance companies’ sole responsibility to place one directly in the same or similar circumstance as was enjoyed prior to the loss.
A basic test to determine is something is insurable is to ask:
- Is there a chance of loss?
- Is there a chance of profit?
If the answer to the first question is YES and the answer to the second question is NO then the subject in question is insurable.
Examples of Insurable Risk Include:
- Personal Risks
- Property Risks
- Liability Risks
Each of which can be grouped into three classes:
- Personal Lines
- Commercial Lines
- Special Risks