How are financial risks related to insurance?

financial risk

Whether a society is economically sound or not is determined by what role is played by industry and commerce. The lifestyle of people in a particular society also reflects the economic well being of the society. Any unforeseen happenings that hamper the working and hence the well being of the society can be taken care of with insurance. Insurance definitely has an important role to play in a country’s economy.

Risk in insurance jargon means the uncertainty that is associated with any kind of financial loss. The loss can be from any damage to property, interruption in business, inability to earn due to a disability, an auto accident and the like. To be able to balance the situation, the risk needs to be reduced as far as possible. The best way to do this is to follow a well designed financial risk management strategy.

With a properly administered risk management system you can control the adverse effect that a risk might cause to a society. The procedure to be followed in risk management is as follows:

  • Identify the risk situation
    Measure the amount of risk that can be caused.
    Find out what are the chances of recurrence of the risk.
    Is there an alternative?
    Prioritise the process.

When you are thinking of looking for an alternative you may use the following options:

Try not to perform the action once again that causes the risk situation.
Try to avoid a risky proposal unless there is absolutely no other alternative.
You may go for an insurance policy to counter the risk.
Try to reduce the risk factor by a systematic process when a risk becomes unavoidable.

A risk can be categorized into,

  1. Pure Risk
    Speculative Risk

Pure risk is a physical loss that the insured faces due to occurrence of a danger that has been insured against. Such a physical loss may be caused because of a halt in factory production, damage to a property arising from fire, accident and the like. Pure risks or risks of trade are such that they can seldom be avoided but can be insured against.

Speculative risks are such that is faced by business or trade. The risk may include loss because of stagnancy of goods, goods being unsold due to war being declared or even if the product goes out of fashion.

Pure risks are risks that can be insured whereas speculative risks cannot be insured. Insurance can be the answer to many a risk management process. There are known risks as well as unknown risks. If you know the risks involved with a certain business or a certain situation, you may take a step to insure yourself against the said risk factors. Unknown perils cannot be insured against and you have no option but to face the situation.

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