risks are classifioed in various ways. one classification is based on the
extent of the damage likely to be caused. crirical or catastrophic risks
are those which may lead to the bankrupcty of the owner. it would happen
if the loss is total, like in a tsunami, wiping out everything. it can also
happen if the deceased person was heavily in debt. important risks may
not spell doom, but may upset family or business finances badly, requiring
a lot of time to recover. the adverse effects of an economic recession is
one such, less damaging are unimportant risks, like temporay illness or accidents.
anoter classification is between financial and non-financial risks
referred to in an earlier paragraph, insurance is concerned with only
financial risks.
Athird classification is between Dynamic and Static risks. synamic risks
are causued by perils which have national conceuence, like inflation,
calamities, technolgy,political upheavals,etc. static risks are caused by
perils which have no consequence on the national economy, like a fire or
theft or misappropriation. Dynamic risks are less likely to occur then static
risks, but are also less predictable.. static risks are more duited to
manageent through insurance
fundamental risks are those thet affect large populations while
particular risks affect only specific persons. atrain crash is a fundamental
risk while a theft is a particular risk. life insurance business deals eith
particular risks, but fundamental risks affect the life insurace company's
experience,as many personas will be affected at the same time,when there
is an. earthquake, flood or riot.
another classification is between pure risks and speculative risks.the
latter are in the nature of betting or gambling where the risk is,to some
extant, under the control of the person concerned, while a pure risk is not
so. it is more in the nature of an act of god. insurace deals with only
pure risks and not speculative risks. this point will be elaborated later,in
the chapter on the principles of life insurace.
the mechanism of insurance is very simple. people who are exposed to
the same risks come together and agree that, if any one of them suffers a
loss, the others will share the loss and make good to the person who lost.
all people who send goods by ships are exposed to the same risk, which
are related to water damage, sinking of vessal, priacy,etc.
if a jumbo jat with more than 350 passengers crashes,the loss would run
into several crores of rupees. no airline would be able to bear such a loss.
it is unlikel thar many jumbo jats in will crash at the same time. if 100
airline companies flying jumbo jest, come together into an insurance
pool, ehenever one of the jumbo jest in in the pool crashes, the loss to loss to be
borne by each airline would come down to a few lakhs of brupees thus,
insurance is a business of sharing. it makes an unbearable loss, bearable.