Risks and insurance

Risk is a condition in which there is a possibility of an adverse deviation from the desired outcome that is expected or hoped for. If there were no risks, there were no insurances. The risk is the object of the insurance contract and it represents the specific element of any type of insurance. A risk is a peril, a danger to which goods, people and business are exposed to, and for which the insurance companies offer protection.

Pure and speculative risks A pure risk exists when there is a chance of loss but no chance of gain. For example, the owner of an automobile faces the risk associated with a potential collision loss. If a collision occurs, the owner will suffer a financial loss. If no collision occurs, the owner does not gain, so the owners financial position remains unchanged. A speculative risk exists when there is a chance of gain as well as a chance of loss. For instance, investment in a capital project might be profitable or it might prove to be a failure. Private insurers generally insure only pure risks. With certain exceptions, speculative risks are not considered insurable. Diversifiable and nondiversifiable risks A risk is diversifiable if it is possible to reduce risk through pooling or risk-sharing agreements. A risk is nondiversifiable if pooling agreements are ineffective in reducing risk for the participants in the pool.

Static and dynamic risks Dynamic risks are those resulting from changes in the economy. Changes in the price level, consumer tastes, income and output, and technology may cause financial loss to members of the economy. Are considered less predictable than static risks, since they do not occur with any precise degree of regularity.

Static risks involve those losses that would occur even if there were no changes in the economy. These losses arise from causes other than changes in the economy, such as the perils of nature and the dishonesty of other individuals. Unlike dynamic risks, static risks are not a source of gain to society. Static losses tend to occur with a degree of regularity over time and, as a result, are generally predictable. Because they are predictable, static risks are more suited to treatment by insurance than are dynamic risks.

Fundamental and particular risks The distinction between fundamental and particular risks is based on the losses. Fundamental risks involve losses that are impersonal in origin and consequence. They affect large segments or even all of the population. Particular risks involve losses that arise out of individual events and are felt by individuals rather than by the entire group. They may be static or dynamic. Unemployment, war, inflation, earthquakes and floods are all fundamental risks. The burning of a house and the robbery of a bank are particular risks.

Insurance

The insurance concept appeared probably together with the apparition of the human society. Over the time, two types of economies characterized our society: exchange economies (with proper elements, like: exchange markets, money, various financial instruments) and natural economies, used long time before the first ones. Insurance as an instrument that offers financial compensation for unlucky events, the payments being made from the contributions of other parties involved in this set-up. From this definition results the existence of a fond that is formed through the contribution of all the insureds, with the help of which, the compensation in case of a loss, is paid. The insurance has as a basic starting point a willing agreement (contract) between the insurer and the insured, through which the insurer offers protection to the insured for the assumed risks, being obligated to cover the damage suffered by the insured, in exchange of a sum of money paid by the insured, named insurance premium.

The insurance transfers the risks and also the damages of a person to an insurance company, offering financial security. Through the indemnification, the insured is brought to the initial financial situation that he had before the occurrence of an insured event. The main characteristic of insurance being the compensation of the losses suffered, not gaining a profit.

Bibliography:
Badea, G. Dumitru Insurance and Reinsurance, Economic Ed., 2003, p. 66; Ciurel, Violeta Asigurari si Reasigurari Abordari teoretice si practici internationale, ALL Beck Ed., Bucharest, 2000;