THE RISK

Concept & Meaning

There is no definite or commonly accepted definition of term ‘risk’. However for the
purpose of insurance, this term refers to the future risk of loss. A few definitions of the term
‘risk’ as given by well known authorities on the subject are as follows: Risk is the name of
uncertainty and uncertainty is one of the basic realities of life. “In this world, nothing can be
said to be certain except death and taxes”. Therefore, uncertainty and risk remain in every
part of life.

DEFINITIONS

-Benjamin Franklin “Risk is the chance of loss or injury”

- Boon and Kurtz “Risk is a measurable uncertainty”

- Frank H. Knight “Risk is the variation in the possible outcome that exists in nature in a
given situation”.

Williams and Heins Thus risk is the uncertainty or chance of loss or injury, which is one of
the realities of life.

In simple words risk is danger, peril, hazard, chance of loss, amount covered by
insurance, person or object insured. The risk is an event or happening which is not planned
but eventually happens with financial consequences resulting in loss. There is saying higher
the risk more the profit. A risky proposal can on one hand bring higher profits but on the
other hand looming losses. The risk can never be certain or predictable. Therefore there is
need for the risk management.

The risk management is nothing but a method to prejudge the risk that may come up
sometime in future. It is not prediction but a process of reducing the risk to a minimum level.
Risk management involves a number of measures that are used to keep the risk at possible
minimum level.

In our day to day life also we take many steps to keep the risk at lower level for
example most people do not keep valuables at home and rather prefer to keep them in a bank
locker by paying certain locker rent to the bank.

Similarly risk of life, health or property is reduced by purchasing a proper insurance.

All these actions of individual persons are done under fear of uncertainty and unpredictability
of future. Likewise in business and commerce also an element of fear of loss always exists if
the risk components are not managed properly. Risk is a fear of happening something adverse
 and in order to restrict such adverse happenings a plan is envisaged to overcome such adverse
happenings. This is called as risk management.

Types of Risk:
Pure risk
Pure risk is a situation that holds out only the possibility of loss or or no loss. For
example, if you buy a new textbook, you face the prospect of the book being stolen or not
being stolen. The possible outcomes are loss or no loss. Also, if you leave your house in the
morning and ride to school on your motorcycle you cannot be sure whether or not you will be
involved in an accident, that is, you are running a risk. There is the uncertainty of loss. Your
motorcycle may be damaged or you may damage another person’s property or injured
another person. If you are involved in any one of these situations, you will suffer loss. But if
you come back home safely without any incident, then you will suffer no loss. So in pure
risk, there is only the prospect of loss or no loss. There is no prospect of gain or profit under
pure risk. You derive no gain from the fact that your house is not burnt down. If there is no
fire incident, the status quo would be maintained, no gain no loss, or a break-even situation.
Therefore, it is only the pure risks that are insurable.

Different Types of Pure Risk

Both the individual and business firms face different types of pure risks that pose great threat
to their financial securities. The different types of pure risks that we face can be classified
under any one of the followings:

(i) Personal risks

(ii) Property risks
(iii) Liability risks

Personal Risks

Personal risks are those risks that directly affect an individual.

Personal risks detrimentally affect the income earning power of an individual. They involve
the likelihood of sudden and complete loss of income, or financial assets sharp increase in
expenses or gradual reduction of income or financial assets and steady rise in expenses.
Personal risks can be classified into four main types:

(i) Risk of premature death

(ii) Risk of old age
(iii) Risk of sickness
(iv) Risk of unemployment

 Risk of Premature Death

 It is generally believed that the average life span of a human being is 70 years.
Therefore, anybody who dies before attaining age 70 years could be regarded as having died
prematurely. Premature deaths usually bring great financial and economic insecurity to
dependants. In most cases, a family breadwinner who dies prematurely has children to
educate, dependants to support, mortgage loan to pay. In addition, if the family bread-
winner dies after a protracted illness, then the medical cost may still be there to settle and of
course the burial expenses must have to be met. By the time all these costs are settled, the
savings and financial assets of the family head may have been seriously depleted or possibly
completely spent or sold off and still leaving a balance of debt to be settled.

The death of family head could render some families destitute and sometimes
protracted illness could so much drain the financial resources of some families and
impoverish them even before the death of the family breadwinner.

When a family breadwinner dies, the human-life value of the breadwinner would be
lost forever. This loss is usually very considerable and creates grate financial and economic
insecurity. What is a human life value? A human life value is the present value of the share
of the family in the earnings of the family head.

 Risk of Old Age

The main risk of old age is the likelihood of not getting sufficient income to meet
one’s financial needs in old age after retirement. In retirement, one would not be able to earn
as much as before and because of this, retired people could be faced with serious financial
and economic insecurity unless they have build up sufficient savings or acquired sufficient
financial assets during their active working lives from which they could start to draw in old
age.

Even some of the workers who make sufficient savings for old age would still have to
contend with corrosive effect of inflation on such savings. High rate of inflation can cause
great financial and economic distress to retired people as it may reduce their real incomes.

 Risk of Poor Health

Everybody is facing the risk of poor health. It is only when people are healthy, that
they can meaningfully engage themselves in any productive activity an earn full economic
income. Poor health can bring serious financial and economic distress to an individual. For
example, without good health, nobody can gainfully engage himself in any serious economic
undertaking an maximized his economic income.

A sudden and unexpected illness or accident can result in high medical bills.
Therefore, poor health will result in loss of earned income and high medical expenses. And
unless the person has adequate personal accident and health insurance cover or has made
adequate financial arrangements for income from other sources to meet these expenses, the
person will be financially unsecured.
 Risk of Unemployment

The risk of unemployment is a great threat to all those who are working for other
people or organizations in return for wages or salaries. The risk equally poses a great threat
to all those who are still in school or undergoing courses of vocational training with the
notion of taking up salaried job after the training period. Self-employed persons, whose
services or products are no longer in demand, could also be faced with the problem of
unemployment.

Unemployment is a situation where a person who is willing to work and is looking for
work to do cannot find work to do. Unemployment always brings financial insecurity to
people. This financial insecurity could come in many ways, among which are:

(i) The person would lose his or her earned income. When this happens, he will suffer
some financial hardship unless he has previously built up adequate savings on which he can
now start to draw.
(ii) If the person fails to secure another employment within reasonable period of time, he
may fully deplete his savings and expose himself to financial insecurity.
(iii) If he secures a part-time job, the pay would obviously be smaller than the full-time pay
and this entails a reduction of earned income. This would also bring financial insecurity.

Speculative Risks:

Speculative risk is a situation that holds out the prospects of loss, gain, or no loss no
gain (break-even situation). Speculative risks are very common in business undertakings.
For example, if you establish a new business, you would make a profit if the business is
successful and sustain loss if the business fails.

If you buy shares in a company you would make a gain if the price of the shares rises
in the stock market, and you would sustain a loss if the price of the shares falls in the market.
If the price of the shares remains unchanged, then, you would not make a profit or sustain a
loss. You break-even. Gambling is a good example of speculative risk. Gambling involves
deliberate creation of risk in the expectation of making a gain. There is also the possibility of
sustaining a loss. A person betting $500 on the outcome of the next weekend English
Premier League Match faces both the possibility of loss and of gain and of no loss, no gain.
Most speculative risks one dynamic risk with the exception of gambling situations. Other
examples of speculative risk include taking parts in a football pool, exporting to a new
market, betting on horse race or motor race.

Speculative risks are no subject of insurance, and then are therefore not normally
insurable. They are voluntarily accepted because of their two-dimensional nature of gain or
loss.
Liability Risks

Most people in the society face liability risk. The law imposes on us a duty of care to
our neighbour and to ensure that we do not inflict bodily injury on them. If anyone breaches
this duty of care, the law would punish him accordingly. For example, if you injure your
 neighbour or damage his property, the law would impose fines on you and you may have to
pay heavy damages. Unfortunately, one can be found liable for breach of duty of care in
different ways and the best security seems to be the purchase of liability insurance cover.

Liability Risks have two peculiarities:

(i) Under liability risk, the amount of loss that can be involved has no maximum upper
limit.
The wrong doer can be sued for any amount. For example, while riding on your bicycle
valued $500, you negligently cause serious bodily injury to another person, that person can
sue you for any amount of money, say $5000, N10,000 or even more depending on the nature
of the injury.

In contrast, if the bicycle value at $500 is completely damaged by another person, the
maximum amount of compensation (indemnity) that would be paid to you for the loss of the
bicycle is jus $500, that is, the actual value of the bicycle.

ii. Under liability risks your future income and assets may be attached to settle a high court
fines if your present income and assets are inadequate to pay the judgment debt. When this
happens, your financial and economic security would be greatly endangered.
Property Risks

Property owners face the risk of having their property stolen, damaged or destroyed
by various causes. A property may suffer direct loss, indirect loss, losses arising from extra
expenses of maintaining the property or losses brought about by natural disasters. Natural
disasters such as flood, earthquake, storm, fire etc can bring about enormous property losses
as well as taking several human lives. The occurrence of any of these disasters can seriously
undermine the financial security of the affected individual, particularly if such properties are
not unsecured.

Direct Loss

Direct loss is that loss which flows directly from the unsecured peril. For example, if
you insure your house against fire, and the house is eventually destroyed by fire, then the
physical damage to the property is known as direct loss.

Indirect Loss or Consequential Loss

Indirect or consequential loss is a loss that arises because of a prior occurrence of

another loss. Indirect loss flows directly from an earlier loss suffered. The loss is the
consequence of some other loss. It arises as an additional loss to the initial loss suffered. For
example, if a factory that has a fire policy suffers a fire damage, some physical properties like
building, machinery maybe destroyed. The loss of these properties flows directly from the
insured peril (fire). The physical damage to the properties is known as direct fire loss.

But in addition to the physical damage to the properties, the firm may stop production
for several months to allow for the rebuilding of the damaged of the premises and
replacement of damaged equipment, during which no profit would be earned.
 This loss of profit is a consequential loss. It Is not directly brought about by fire but
flows directly from the physical damage brought about by fire and hence indirectly from the
fire incident. Other examples of consequential loss are the loss of the use of the building and
the loss of a market.

Extra Expenses

Alternative arrangement may have to be made to rend a temporary premises, pending

the repairs or reinstatement of the damaged building, and it may also be necessary to rent,
hire or lease a machine in order to keep production going so as not to disappoint customers
and in the process lose market to competitors. The expenses incurred in securing the
alternative premises, an renting, hiring or leasing a machine are referred to as extra expenses.
These expenses may not have been insured if there has been no fire damage.

FUNDAMENTAL RISK

A fundamental risk is a risk which is non-discriminatory in its attack and effect. It is

impersonal both in origin and consequence. It is essentially, a group risk caused by such
phenomena like bad economy, inflation unemployment, war, political instability, changing
customs, flood, draught, earthquake, weather (e.g. harmattan) typhoon, tidal waves etc. They
affect large proportion of the population and in some cases they can affect the whole
population e.g. weather (harmattan for example). The losses that flow from fundamental
risks are usually not caused by a particular individual and the impact of their effects falls
generally on a wide range of people or on everybody. Fundamental risk arise from the nature
of the society we live in or from some natural occurrences which are beyond the control of
man.

The striking peculiarity of fundamental risk is that is incidence is non-discriminatory

and falls on everybody or most of the people. The responsibility of dealing with fundamental
risk lies with the society rather than the individual. This is so because, fundamental risks are
caused by conditions which are largely beyond human’s control and are not the fault of
anyone in particular. The best means of handling fundamental risk is the social insurance, as
private insurance is very inappropriate. Although, it is on record that some fundamental risk,
like earthquake, flood are being handle by private insurance.

PARTICULARS RISKS

A particular risk is a risk that affects only an individual and not everybody in the
community. The incidence of a particular risk falls on the particular individual affected.
Particular risk has its origin in individual events and its impact is localized (felt locally). For
example, if your textbook is stolen, the full impact of the loss of the book is felt by you alone
and not by the entire members of the class. You bear the full incidence of the loss. The theft
of the book therefore is a particular risk.
If your shoes are stolen, the incidence of the loss falls on you and not on any other person.
Particular risks are the individual’s own responsibility, and not that of that society or
community as a whole. The best way to handle particular risk by the individual is the
purchase of insurance cover.
STATIC RISK

Static risks are risks that involve losses brought about by irregular action of nature or
by dishonest misdeeds and mistakes of man. Static losses are present in an economy that is
not changing (static economy) and as such, static risks are associated with losses that would
occur in an unchanging economy. For example, if all economic variables remain constant,
some people with fraudulent tendencies would still go out steal, embezzle funds and abuse
their positions. So some people would still suffer financial losses. These losses are brought
about by causes other than changes in the economy. Such as perils of nature, and the
dishonesty of other people.

Static losses involve destruction of assets or change in their possession as a result of

dishonesty. Static losses seem to appear periodically and as a result of these they are
generally predictable. Because of their relative predictability, static risks are more easily
taken care of, by insurance cover then are dynamic risks. Example of static risk include theft,
arson assassination and bad weather. Static risks are pure risks.

DYNAMIC RISK

Dynamic risk is risks brought about by changes in the economy. Changes in price
level, income, tastes of consumers, technology etc (which is examples of dynamic risk) can
bring about financial losses to members of the economy. Generally dynamic risks are the
result of adjustments to misallocation of resources. In the long run, dynamic risks are
beneficial to the society. For example, technological change, which brings about a more
efficient way of mass producing a higher quality of article at a cheaper price to consumers
than was previously the case, has obviously benefited the society.
Dynamic risk normally affects a large number of individuals, but because they do not occur
regularly, they are more difficult to predict than static risk.

RISK COVERED IN LIFE INSURANCE POLICY

Human life has many probable uncertainties and risks such as untimely death,
disability, fatal illness as well as a very long life. These risks can be successfully countered
with the help of life insurance.
The ultimate objective of life insurance contract is to save the insured from economic loss
caused by the loss of life or any other unfortunate event. Thus, the scheme of life insurance
policy basically covers the risk of death. In case of death, insurance company pays full sum
assured, which is several times larger than the total of the premium paid and thereby saves
the family from the financial strain due to unforeseen and premature death.

Hence, in life insurance, facts which tend to shorten the span of the life assured would
amount to the circumstances affecting the risk and these facts are regarded as material facts
for purposes of the duty of disclosure

(a) Age: The age of the life who is assured is the most important factor to affect
mortality. The insurance company asks for the age nearer to birth days. A person of
22 years 7 months and another person of 23 years 5 months are treated of the age of
23 years. The age proof is very essential for calculating premium rate. The maximum
and minimum limit of age is fixed to avoid risk of mortality.
(b) Build up It includes- height, weight, and the distribution of weight and chest
expansion of the person to be insured. Overweight is the indication of certain hidden
diseases, underweight is also not very desirable. If the assured life is not within the
standard the proposal may not be accepted
(c) Physical Conditions Physical condition of a person has a direct bearing on the
mortality of the life. Conditions of sight, hearing, heart, arteries, lungs, tonsils, teeth,
nervous system are properly examined by the doctors before making his report.
(d) Personal History The personal history of the proposer would reveal the possibility of
death to him. The history may be connected with the health record, past habits,
previous occupation and insurance history.
(e) Family history Family history requires information of habit, health, occupation and
insurance of other family members particularly of the parents, brothers, and sisters.
Longevity of the parents is a relevant factor for determining the degree of risk of the
proposed life to be insured. It is significant to know the transmission of characteristics
by heredity. Heart, lungs, build etc. follow family characteristics.
(f) Occupation The nature of his/her occupation and the factors in occupation that
contribute to enhancing the risk are taken into consideration. If the nature of work is
hazardous it will surely increase the degree of insurance risk. Factory workers
employed in chemical factories, match factories run the risk of contacting poison. The
dirty and unhealthy environment deteriorates the health of the workers.
(g) Residence The insurance risk will be lesser in a good climate area and more in a bad
climate. The geographical location, atmosphere, political stability, climate, travel, etc.
greatly affect the degree of risk. Therefore, all these factors are given due
consideration while assessing risk and the amount of premium.
(h) Present Habits Living standard and personal habits of a person like smoking,
drinking, yoga, cycling, walking etc. also have an impact on the risk factor involved.
Non temperate habits cause increase in mortality and temperate habits tend to increase
longevity of a person.
(i) Morals Departure from accepted standards of ethical and moral conduct involves
extra mortality. Unethical conduct is considered to be a moral hazard. So, insurance is
not given to bankrupt and reputed dishonest persons.
(j) Race and Nationality Mortality rate differs from race to race and nation to nation, in
tropical countries the span of life is shorter than that of persons living in temperate
climate.
(k) Gender Mortality among female sex is higher than that of male sex, because of the
physical hazard of maternity in the former case. Other factors which are also given
due consideration in selection of risk are economic status of the person to be insured,
nature of his occupation and the plan under which insurance is sought.
MARINE INSURANCE

Marine insurance covers the risks faced by ship owners, cargo owners, terminal
handlers and various intermediaries in the shipping business. Looking at various conditions
that can affect your cargo, including weather conditions, pirates, navigation problem, it is
recommended that you avail an appropriate insurance as per the nature of your business and
the risks associated with business operations.

Risk covered under marine insurance

1. Perils of the sea:

Insurance company provides the financial security when the insured property is
damaged due to reason of perils of the sea. The unexpected or sudden accidents such as
storm, collision, robbery, ship sinking, bad weather, typhoon or cyclone etc are the
perils of the sea.
2. Fire:
Many kinds of energy are used in the operation of the ship. When it is used faultily there
may be possibility of fire in form of which the cargo and the ship may be damaged. The
insurance company pays the compensation when the insured property is damaged by
fire.
3. War:
Sometimes condition of war may arise inside the nation or two or more nations. At such
a situation the enemy may capture the ship and the cargo. The insurance company pays
the compensation when the insured party claims or the destruction of the property by the
action of enemy.
4. Pirates and thieves:
When sea pirates and thieves destroy cargo and ship, insurance company pays the
compensation. Sometime pirate create a big problem in sea traveling. The insured party
thus has to receive the compensation if the insured property is damaged due to the
reason of pirates.
5. Jettison:
If it is considered that the part of the ship should be disposed off in the ship due to its
heavy weight and unbalance then to save the ship some parts are thrown off. This
disposing function is called jettison. The loss from jettison also is compensated by the
insurance company.
6. Strikes:
Sometimes strikes may be conducted by the employees. The damage and loss due to the
reason of strikes should be compensated by the insurance company.
7. Barratry:
It is a kind of mischievous and willful action performed by the navigator, captain, crews
and employees of the ship to cause loss and damage to the ship and the cargo of the
shipping company and the parties respectively. Here mischievous act may be of any
nature, such as theft of ship or cargo, setting ship cargo on fire, fraudulent sale of cargo
and so on. These are addition risk. The insurance company can compensate the losses
arising from his type of risks too.
Marine insurance has various kinds of coverage for the benefit of all. However, the policy
does not cover certain situations, also called exclusions. Some of these cases are:

 Wilful, planned or intentional misconduct

 Strike, rioting, war
 Poor packaging quality of the cargo
 Delays
 General leakage or wear and tear of the cargo
 Financial distress or insolvency of the shipping line
 Removal of wreck

FIRE INSURANCE

A fire has the potential to destroy a property or a business, leading to losses of great
scale. To get compensated for such losses, you can opt for fire insurance, covering your
movable and immovable property. The property that you want to insure could be residential,
commercial or industrial.

A fire insurance could be bought as a part of property insurance or as a stand-alone

policy. It offers compensation for the costs incurred in the replacement, repair or
reconstruction of a property that was damaged due to fire. Since the estimation of loss from
fire is unpredictable, this policy is issued with fixed value compensation as an upper limit set
by the property insurance policy. The actual loss or the maximum amount agreed beforehand
is paid as compensation when you file a claim for fire insurance.

Here are the risks covered under a fire insurance policy:

 Fire: Destruction or damage caused to the insured property due to natural heating,
fermentation or spontaneous combustion or when it is undergoing any heating or
drying process can’t be treated under damage to fire. For instance, if paints or
chemicals are kept in a factory, and they catch fire while undergoing heat treatment;
the same will not be covered under the policy. Similarly, if any public authority
orders the burning of insured property, then also it will be excluded from the policy.
 Lightning: The impact of lightning can result in fire or any other kind of damage, like
cracks in a building due to a lightning strike, etc. Both fire and other damages caused
by lightning are covered under this peril.
 Explosion/Implosion: Explosion means sudden, violent burst with a loud voice. An
explosion occurs when the pressure within the vessel reaches to the atmospheric
pressure. The impact of the explosion can also lead to fire damage. On the other hand,
implosion means bursting inward. It usually happens when the external pressure is
more than the internal pressure.
 Aircraft Damage: It includes loss or damage caused to the property directly by
aircraft and aerial devices.
 Riot, Strike, and Terrorism Damage: When a person acts with others to disturb the
public peace, (other than war or invasion) it is called a riot, strike or terrorist activity.
 Any loss or damage caused to the insured property by any such activity or by the
action of any lawful authority in suppressing such disturbances or minimizing
consequences is covered. Though terrorism is excluded from most of the policies, it
can be added as an extension by paying an extra premium.
 Storm, cyclone, typhoon, and flood: These are all types of violent natural
disturbances which can cause damages to your property and therefore, they are
covered.
 Impact Damage: Any damage caused to the insured property when it comes in direct
contact with rail/road vehicle or animal is covered. However, such vehicles or
animals should not belong to the insured in any way.
 Subsidence and Landslide including Rockslide: While subsidence occurs when the
land or building sinks to a lower level, landslide usually occurs on a hill when the
landslides down. Any damage or destruction caused to the insured property due to
subsidence and landslide is covered. However, normal cracking, defective design, and
destruction due to the use of defective materials are not covered.
 Bursting and/or overflowing of water tanks, Apparatus and Pipes: Loss or
damage caused to the insured property by water on account of bursting or
overflowing of water tanks and pipes is insured.
 Missile Testing Operations: Any damage caused due to missile testing operations is
covered.
 Leakage from Automatic Sprinkler Installations: Any damage caused to the
insured place when water accidently discharged or leaked out from automatic
sprinkler installations is covered.
 Bushfire: It covers damages caused due to burning, whether accidental or otherwise,
of bushes and jungles and the cleaning of lands by fire. However, it doesn’t include
damages caused by a forest fire.