Types of Risk

"I can describe types of risk & explain ways to handle risk"

Risk

The possibility of incurring a loss.

Economic Risk

A type of risk that results in financial loss.


Example; a planned housing development, the risk in this case is that the profits from the development will not cover the costs of the development, leaving the developer in debt.

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Non-Economic Risk

A type of risk that may result in the embarrassment or inconvenience without financial impact.


Example; Non-monetary losses such as pain, suffering, inconvenience, emotional distress, loss of society and companionship.

Pure Risk

A type of risk that is a threat of a loss without an opportunity for gain.


Example; The possibility that a person's house will be destroyed due to a natural disaster.

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Speculative Risk

A type of risk that offers the chance to experience gain or loss.


Example; Investing in a junk bond requires you to be a lot more speculative.

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Controllable Risk

A type of risk that occurs when conditions can be controlled to lessen the chance of harm.


Example; Buying insurance to transfer risk somewhere else or to someone else.

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Uncontrollable Risk

A type of risk that cannot be controlled or reduced by actions.


Example; A new business competitor locating nearby.

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Insurable Risk

A type of risk that meets the criteria of an insurance company for coverage.


Example; Infidelity insurance, used to protect your business against dishonest employees.

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Uninsurable Risk

A type of risk that the possible amount of loss is simply upredictable.


Example; Whenever there is war in a country that is an uninsurable risk. It is too widespread.

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Ways that Businesses Manage Risk

Avoid - declining to engage in particular activities due to risk.

Transfer - allow someone else to assume the risk.

Insure - purchasing insurance to cover risk.

Assume - finishing an activity and accepting full responsibility.