Classification of Risk

Classification of Risk:Risks are classified in various ways. One Classification is based on the extent of the damage likely to be caused. Critical or Catastrophic risks are those which may lead to the bankruptcy 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 persons 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 temporary illness or accidents.

Another Classification of Risk is between Financial and Non-Financial risks, referred to in an earlier paragraph. Insurance is concerned with only financial risks.

A third Classification of Risk is between Dynamic and Static risks. Dynamic risks are caused by perils which have national consequence, like inflation, calamities, technology, 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 than static risks, but are also less likely to occur than static risks, but are also less predictable. Static risks are more suited to management through insurance.

Fundamental risks are those that affect large populations while Particular risks affect only specific persons. A train crash is a fundamental risk while a theft is a particular risk. Life Insurance business deals with particular risks, but fundamental risks affect the life insurance company's experience, as many persons will be affected at the same time, when there is an. Earthquake, flood or riot.

Another Classification of Risk is between Pure risks and  Speculative risks. The latter are in the nature of betting or gambling where the risk is, to some extent, under the control of the person concerned, while a pure risk is not. It is more in the nature of an Act of God. Insurance deals with only pure risks and not speculative risks.