POBF 5.02 Types of Risk

Types of Risk and how to handle risk

Definitions

  • Risk is the possibility of incurring loss.
  • Economic Risk involves Personal Risk, Property Risk and Liability Risk. Economic Risk Results in financial loss. Economic risk factors include exchange rates, government regulations, or political stability. Can cause financial loss.
  • Non-Economic Risk results in either embarrassment or inconvenience with no impact financially.
  • Pure Risk is a loss with no possible opportunity of gain.
  • Speculative Risk is the risk you have of either gaining or losing something.
  • Controllable Risk is being able to lessen the chances of harm.
  • Uncontrollable Risk is not being able to lessen the chances of harm.
  • Insurable Risk is meeting the criteria of an insurance company for coverage.
  • Unpredictable Risk is unpredictable amount of loss.

Examples

  1. Risk-
  2. Economic Risk- Exchange rates or Political Stability changing thus affecting an investment, in the stock market for example.
  3. Non-Economic Risk- Being rejected
  4. Pure Risk- If you do not have home insurance and your home burns down then there is no way of being covered. By not having insurance there is no positive outcome to the situation only negative.
  5. Speculative risk- Buying a lottery ticket, you either win some money or you get nothing.
  6. Controllable Risk- Buying any type of insurance to have someone/something else deal with any possible risk.
  7. Uncontrollable Risk- Deciding to go on a boat trip when there is a 45% chance of heavy rain (you cannot control the weather).
  8. Insurable Risk- If a company has enough statistics to prove that the probability of say a natural disaster were to damage any property they can be insured.
  9. Unpredictable Risk- Not knowing when or if a fire or natural disaster could damage your property or when you could be injured.

Ways that businesses manage risk.

Ways of managing risk are as follows:

  1. You can avoid the risk entirely
  2. You can transfer the risk to someone else
  3. Insure the risk
  4. Assume the risk