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Risk is the possibility of an unfavorable deviation from expectations; that is, the occurrence
of an undesirable contingency. It is the possibility that something we do not want to happen
will happen or that something we want to happen will fail to do so. Such an occurrence is
commonly referred to as a loss.

According to M.N. Mishra, “Risk is the uncertainly of loss.”

According to Prof. James Athearn;

Risk may be defined ---
(a) The possibility of loss or
(b) The possibility of unfavorable deviation from expectations because any deviation
from expectations is a loss.

From the above discussion risk, which is the possibility of an unfavorable deviation from
expectations, causes uncertainty to a person who is both exposed to it and aware of his

If there were no possibility of loss, there would be no risk. Thus, factors which cause or
contribute to the occurrence of loss are significant in the analysis of risk. Two such factors
which work together in causing losses are “Peril” and “Hazards”.

Peril cause actual events to deviate from those we expect. They are the immediate cause of
loss. Their existence creates risk by creating the possibility of an unfavorable deviation
from expectations. Identification of perils as essential for insurance as well as loss
prevention purpose.

Hazard is the condition that lies behind the occurrence of losses from particular perils.
Hazard influences risk by increasing the probability of loss. Certain conditions are referred
to as being “hazardous”. For example: Timber cutting.
The more hazardous conditions are:
1. Physical Hazard
2. Moral Hazard
3. Morale Hazard

1) Physical Hazard
Physical hazards are the physical aspects of property subject to risk which
influence the chance that such property may be damaged or destroyed. Location,
construction, and use are physical hazards which effect risk.

2) Moral Hazard
Moral hazard also affects the probability of loss. Dishonesty of lack of integrity of
the individual can increase the chance of loss to 100 percent. A dishonest insured
may burn his own home or rob his own store in order to collect the insurance. Moral
hazard may make a risk uninsurable.
3) Morale Hazard
Morale hazard does not involve dishonesty but in an attitude of carelessness and
lack of concern that can have the effect of increasing the chance that a loss rill

Hazard creates a condition or conditions conducive to a peril causing loss, and loss is an
unfavorable deviation from expectations. It appears that the sources of loss-cause—and, in
turn, risk—may be classified as social, physical and economic. Determination of the source
of risk is important because it has a bearing on how they may be handled.

A major source of risk is social. That is, the actions of people create occurrences which
cause unfavorable deviations from our expectations.

 Theft: People steal. Almost a million automobiles are stolen in the United States
every year---about two every minute. The FBI estimates that losses caused by
robbery, burglary, larceny. Not all thieves, however, are outsiders. Employees steal
millions of dollars worth of tools, equipment, materials and merchandise from their
employers every day.

 Vandalism, arson, riots, and strikes: Vandals are a source of risk for property
owners. Public buildings and property seem to be particularly susceptible to such
loss, but private property is also damaged by vandals. Thousands of fires are caused
by arson each year. Riots have always been a source of risk but in recent years they
have reached catastrophic proportions. Riots loot stores, damage or destroy
property of all kinds, bring business activity to a standstill, and inflict injury or
death upon innocent bystanders and law enforcement personnel. Strikes sometimes
lead to violence which results in considerable property damage as well as personal
injury or death. They also cause a loss of production. A prolonged strike can cause
serious loss a firm and even result in bankruptcy.

 Accident: People cause accidents that injure themselves and/or others and cause
tremendous property damage. Golf balls occasionally strike people or go through
windows. Small boys with baseballs are another source of loss. Carelessly dropped
cigarettes may cause fires which in turn lead to tremendous property damage losses
as well as personal injury and loss of fire. Thousands of workers are injured or killed
annually in industrial accidents in which human error or carelessness is the major

There are many physical sources of risk; that is, peril which can cause unexpected losses. In
the letter case, of course, the ultimate sources of the risk are social. Many risks are
complex in source but fall primarily into the physical category.

 Fire: Fire is a major cause of injury, death, and property damage. Destructive fires
result from natural causes, Such as lightning, or physical causes, such as defective
wiring or they may be caused by carelessness or arson.
 Weather: Weather is a serious risk. Sometimes there is too much rain, in which case
crops are inundated and rivers overflow their banks. Floods are an annual
occurrence. On the other hand, drouth can cause huge losses through crop damage
as well as destruction of soil when accompanied by wid. Hail storms also destroy
crops and cause serious property damage. Tornadoes skip through various parts of
the country from time to time killing people and destroying whole towns and villages.
Lightning causes fire which in turn kills or injures and damages property. It also
does considerable damage directly.

 Landslide: In recent years, landslide has become a common source of property

damage. As more areas have become congested, houses have been built on unstable
soil. As the soil moves, the houses are damaged or destroyed.

 Earthquake: One of the most spectacular and awe-inspiring sources of property

damage and loss of life is earthquakes.

Economic risks affect the whole society—they are all pervasive.

 Depression and inflation: Economic depression is characterized by low levels of

production and employment. Decline in production cause lower profits or even losses
for many business firms. Fluctuations in the general level of economic activity and
inflation cause unfavorable deviations from expectations and create risks of great
magnitude for most individuals, families, and business managers.

 Local fluctuations: Even during periods when the economy as a whole is relatively
stable, certain area may experience booms or recessions. These expose individuals
and businessmen to the same risks as general fluctuations in economic activity.

 Individual firms: Individual firms are not stable. Some are successful, others are
not. Owner’s loss part or all of their investments and workers are exposed to
unemployment when a firm fails. In some cases, the economic well-being of a whole
town may depend upon the successful operation of a single firm or plant.


There are two methods of classification of risk.
1. The judgment method
2. The numerical rating system.

1. The judgment method

Under this method the individual decision of experienced persons, in the medical. actuarial,
underwriting and other departments are combined. These persons are qualified and
permitted to take decision. Unlike the other method, no rigid rules and scales are
prescribed and followed. Personal judgment, therefore, plays vital part in the whole system


 The judgment method is generally used where a single factor is to be considered or
where the decision for acceptance or rejection is to be taken.
 The second use of this method is that where the decision for numerical rating fails
to decide, this method comes to much is assistance because the merit of each and
every factor is personally considered.
 The personal decision of the officers and experts may be quick and significant.


 Under this method, no rigid rules and scales are prescribed and followed.
 The personal direction may be biased by the whims and negligence of the officers.
 Sometimes officers take inexperienced decision which is harmful for the insurance
 It is not very much scientific.

The various life risks cannot be treated individually, so they are put under a few broad
categories based on the degree of each risk. There are two main classes of risk:
1. Uninsurable Risks.
2. Insurable Risks.
a) Standard Risk.
b) Sub0standard Risk.
c) Super-standard Risk.

1. Uninsurable Risk
If the insurance can be purchased at higher premium, there should not be any uninsurable
risk. Theoretically, after investigating all the factors affecting a risk, the life insurance
company should be able to give each due consideration and determining the premium charge
for the insurance. Practically however, there are a number of reasons why some persons are
not insurable. First reasons, the premium would be much high for these persons which will
be against the insurance principle because higher premium will stimulation to those who are
at death bed. The second reason is that unknown risk cannot be insured to avoid the
existing policy holders.
2. Insurable Risks
The insurable risks are those which after the selection process can be carried out by an
insurer although there can be different terms and conditions for different policy-holders.

a) Standard Risk
The standard risk is related with the normal life where there is no much or no less
risk. There are certain criteria on which the risks are judged as normal life. This
group does not contain only those persons who are free from all impairments nor
those persons who are under serious illness. It is the group where majority can be
included and who may either more or less than the average.

b) Sub-standard Risk
The sub-standard risks are above the standard risk and below the uninsurable risk.
If the life proposed crosses the maximum limit of sub-standard risk, that will be
treated as uninsurable. The sub-standard risk is insured after payment of additional
c) Super-standard Risk
The super standard risk is present where there is Loesser risk than the standard
risk. This is also called a preferred risk. An insurer does not prefer to issue
preferred risk policies because it increases the premium on other standard risk
which may cause reduction in loss of business.

3. Pure risk
A person who purchases a share of common stock does so with expectation that the price of
the stock will rise, thus improving his financial position. Instead of rising, the price may fall.
In entering the transaction he exposes himself to both possibilities – either a gain or a loss.
Risk is the possibility of loss but when there is also the possibility of gain, the risk is
referred to as speculative. Pure risk involves only the possibility of a loss; the deviation
from expectations can be unfavorable only. There is no expectation of gain with reference
to the risk but rather an expectation of an absence of loss. A person expects to live but he
is exposed to the possibility that he may die prematurely. This is a pure risk because the
deviation from his expectations can go only one way. There is a possibility of loss only.

The pure risks which confront individuals, families, firms, and other organizations may be
classified as:
(a) Personal risks.
(b) Property risks.
(c) Liability risks.
(a) Personal risks
Because all loss is ultimately borne by people, it could be said that all risks are
personal. Therefore, the risks of premature death, sickness, disability,
unemployment, and dependent old age are classified as personal.

(b) Property risks

The possibility of loss to property, such as damage or de-structure of an automobile
by collision or its loss by theft.

(c) Liability risks

The possibility of becoming legally obligated to pay for damage to the person or the
property of others.

Created by, Russel (DIIT)

Composed by, Sojib (DIIT)