Risk is the most important part of all insurance policies. Calculating the cost of insurance policies is about defining the chance, severity, and number of risks that the insurer will pay for in case the worst happens.
There are as many different types of risk as there are risky events in the world, but insurers tend to place them into six specific categories. Most forms of risk fit in more than one category.
The most popular type of risk to insure, pure risk defines a specific type of event with a known, negative outcome.
Most insurance coverage you are familiar with, such as fires, theft, car accidents and similar, easily measurable events are seen as pure risks.
The opposite of pure risk, a speculative risk is a somewhat unpredictable outcome, such as investing in a stock that loses money for you rather than increasing it.
The difference between a pure risk and a speculative risk is that speculative risks can be either positive or negative and as a result are often willingly entered into because of this, whilst a pure risk only has negative outcomes.
Because of this, speculative risks are rarely covered by insurance in the same way insurers would not cover a loss caused by gambling.
Insurable risks are almost always quantifiable and are therefore financial risks. There is a value to the subject that is insured and so if a negative event happens an appropriate amount of compensation can be provided.
This can most obviously be seen in contents insurance or commercial building insurance where a specific value can be placed on the property or items insured and the cost of replacing them.
By contrast, a non-financial risk is where it is difficult to assign a monetary value to a risk that has been made, such as making a poor choice or disliking its outcome.
In the past, these were less insurable, but an increasing number of insurers can attempt to cover operational risks and risks to reputation.
Otherwise known as a natural risk, these are risks that are beyond the scope of human control. These include natural disasters such as floods and are highly desired insurance options.
The most popularly insured type of risk, particular risks are risks that occur as a result of other people, such as burglary, deliberate injury or loss of shipments caused by human error.