What is risk?
We have the dictionary meaning of risk as well as the insurance definition of risk. But to the ordinary man out there, risk is the chance of a loss happening. It is the possibility of an unfortunate thing happening to you. Risk is you and I facing the unexpected that is not desired by anybody. Life is full of risks, that is, uncertainties of life. In our personal and business life we are exposed to various forms of risks. So in all endeavours of life, we are faced with risks. So better put, all human endeavours are associated with one form of risk or the other.
So the question is ‘how do we react to risks since we know that we face risks in all we do every day?
Classification of risks
Risks can be classified in a number of ways. We have speculative or pure risks. We have financial and non-financial. Then we have fundamental risks. So it is good for one to recognise these classifications because when you understand them, you know how best to treat them.
Financial risks are those risks that if they happen or materialise will result in financial losses. And a good example is the risk of your car being stolen. You will suffer to the extent of the cost or the purchase value of that car. In the case of an accidental damage to the car, you will suffer financially to the extent of what it takes you to repair it. In the case of the risk of causing injury or the death of a person by using that car, you will suffer financially to the extent of liability damages that you have to pay either for the death or for treating the person.
Non-financial risks are risks that will not result in financial losses but somebody will suffer a loss when such risks happen. However, it can be very difficult to quantify them in financial terms. Examples are sentimental or emotional losses. For instance emotional losses attached to the disappointment one faces in the event of a failed relationship, marriage etc.
A speculative risk is one that leaves room for gain or loss, e.g gambling, betting. When you gamble or bet, you already know the risk you are facing. For a risk to be authentic there must be an element of uncertainty, that is, the chances that this will happen or not. If it happens, you will suffer a loss, if it doesn’t happen, you will be at peace. Speculative risk provide for gain or lose situation, therefore it does not qualify as an insurable risk.
Pure risks are the ones that expose you to financial losses in the sence that you will never make any gain from it, e.g loss to your car due to theft; accidental damage to your car; fire damage to your house etc. Any compensation that you get will just bring you back to the position you were occupying before the loss.
These are risks of nature that goes beyond any scientific management. They are such that when they happen, the magnitude can ruin any national economy, e.g war, earthquake, terrorism. It is not that insurance cannot handle them because we now have covers for terrorism, political risks and so on, but by their fundamental nature, losses emanating from them could be so huge that they could lead to total destruction.
Are all risks insurable?
From the classifications above, not all risks are insurable. So what are insurable risks and what are the factors that must be present.
From the classification, financial risks are insurable because you can quantify the losses, that is, you can reduce the losses to financial term.
Sentimental/emotional losses are non-financial because you cannot quantify them. You can’t express it in financial terms so it becomes difficult for you and the insurer to agree on all the other things.
For pure and speculative risks, pure risks are insurable because there is no element of you profiting or gaining from losses coming from pure risks while for speculative risks, you already know what you are going into because certain things are bound to happen and you are either making a gain or a loss. In essence, it will not qualify for insurance or make it insurable. It will be against public policy coupled with the fact that you already know what you are going into. The key element in insurance is probability; therefore, if you are certainly sure of what you are staking, then it is not insurable.
Fundamental risks, which are risks of war, earthquake, terrorism, political risks and so on are insurable. In the early times of insurance, they were not insurable, however, in modern times, they are insurable. Due to their catastrophic nature when they result in losses and because of the effect and magnitude of fundamental risks, it has been difficult for insurance houses or markets to build the required capacity that can provide for such losses. However, by the day people are beginning to look at ways and means of providing cover for such risks. In our market, people are asking that we provide cover for kidnapping, terrorism, political risks. In some parts of Africa, e.g South Africa, Egypt, and Tunusia, people are already coming together to underwrite such risks.