Basic ideas about Risk and Insurance

Basic ideas about Risk and Insurance

Basic ideas about Risk and Insurance is known to all this is my opinion. Most of the bankers have know knowledge about insurance. For this reason I try to represent here a basic knowledge about risk and insurance related information.

What is risk?

Risk has been defined as the uncertainty as to the occurrence of an economic loss.It is the passivity of adverse result from a desired outcome. Risk and probability are not synonymous.

We must understand the difference between risk and probability. The terms hazard peril are closely related to probability than they are to risk. For example, collision is a peril which causes motor car accident and loss. The condition which makes the occurrence of collision more likely is called the hazard. For example, foggy weather is the hazard which create the peril of collision . This means probability of collision increases  when the hazard of foggy weather create the peril collision.Therefore, one can say that probability is the long run chance that out of given number of possibilities, certain number of specific  events will occur. But risk is the uncertainty  as to occurrence of a loss. This is measured in the terms of degree of variation that actual events bear to probable events. The larger number of exposures, the smaller is the risk. This is because under this situation, the smaller is the variation that actual events bear to the probable events. This called the law of large number. The greater the uncertainty, the greater is the risk.

How do we distinguish between pure risk and speculative risk?

The term pure risk must be distinguished with speculative risk.Pure risks are those which have the prospect of loss or no loss. But in a speculative risk the fear of loss and the hope of gain are both associated with it. The normal business risk is a speculative risk. However, the risk of fire is a pure risk. It is only the pure risk which dealt with by insurance. Although risks of an individual are always uncertain and not measurable, it can be measured with the help of knowledge of the past occurrences by the way of applying  law of large number. Insurance for all purposes is a device to cover losses arising out of uncertain events. However, in general Insurance premium or the price of insurance is certain and measures of indemnity are also known both to the insured and insurer. Therefore, the element of uncertainty in General Insurance associated with only the happening or not happening of the events.

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