After reading this article you will learn about:- 1. Meaning of Risk 2. Types of Risk 3. Transfer.

Meaning of Risk:

In simple words risk is danger, peril, hazard, chance of loss, amount covered by insurance, person or object insured. The risk is an event or happening which is not planned but eventually happens with financial consequences resulting in loss. There is saying higher the risk more the profit.

A risky proposal can on one hand bring higher profits but on the other hand looming losses. The risk can never be certain or predictable. Therefore there is need for the risk management.

The risk management is nothing but a method to prejudge the risk that may come up sometime in future. It is not prediction but a process of reducing the risk to a minimum level. Risk management involves a number of measures that are used to keep the risk at possible minimum level.


In our day to day life also we take many steps to keep the risk at lower level for example most people do not keep valuables at home and rather prefer to keep them in a bank locker by paying certain locker rent to the bank.

Similarly risk of life, health or property is reduced by purchasing a proper insurance. All these actions of individual persons are done under fear of uncertainty and unpredictability of future. Likewise in business and commerce also an element of fear of loss always exists if the risk components are not managed properly.

Risk is a fear of happening something adverse and in order to restrict such adverse happenings a plan is envisaged to overcome such adverse happenings. Which is called as risk management. In the field of Insurance such fears, uncertainties, prejudgments of forthcoming risks and the size of risk and its potentiality is determined by the Actuary appointed by the IRDA.

The first step towards arrested the risk or fear of risk is to identify the risk. But how to identify it unless it is known what type of risk should looked into. Hence it important to know the nature of the risk.

Types of Risk:


The risk can be of many types but it revolves around two main factors:

(i) Pure Risk:

Such risks are accidental in nature. Being accidental can bring potentially in losses. Any accident brings in physical loss and therefore a pure loss is a physical loss that the insured faces due to occurrence of an event that has been insured against. Physical loss may be of any type be it a loss in business, due to fire hazards and losing stocked goods, due damage to a property for any reason.

An accident of any type culminating into financial loss or loss of life are some examples of pure risks. All types of physical risks are hard to be avoided. They may occur due to human negligence or by natural calamities, Riots, strikes, sudden breakdown in a manufacturing unit. Fall in prices of goods stored, and so many other reasons that contribute to cause losses As per Prof. M Haller “The possibility that positive expectations of a Goal Oriented System will not be fulfilled”.


This definition of Prof. Haller is although not confined to the definition of pure risk but is applicable to the whole term of “RISK”. It is important to note that the pure risks or risk of trade are such that they can seldom be avoided buy t can be insured against.

(ii) Speculative Risks:

Such types are always speculative may it be profit or loss in both cases speculations works. Mostly speculation is done in the field of trade. There may un accounted reasons for creation of risks in the field of trade may be price rise, inflation, rotting of stock of goods or stagnations of stocks due to strike, terrorists threat, declaration of war or the stock going out of use or fashion.

By the meaning of the word speculation one can understand that speculation is type of purchase or sale of shares on an estimate of whether the share value rise or fall, with intention of making profit, or avoiding a loss It is like gamble on future price movements, whether in share, land, commodity or money. Gambling itself is a speculative risk which cannot be relied upon. A gambler can never be certain of win position and can never be trusted in the business of gambling.


The difference between the two risks is that the pure risks can be insured but the speculative risks cannot be insured.

Only if for the purpose of going deep into identifying the factor of risk it can be classified in the way depending on the way of how an individual or accompany feels fears for the happenings in future. As such the classification can be divided into as many reasons and as many companies that exist on the earth as on date.

There should be a specific limit of identifying a risk like Pure risk and speculative risk. If one presumes risk can be a certain risk, uncertain risk, a visual risk and un -visual risk, a temporary risk and a permanent risk etc. but there is no end of identifying an actual risk.

It is therefore necessary that the track record of previous happenings in every field of life is taken into account to estimate the future risks in a particular field may it be a risk of life, health, industry, trading, business, commerce, vehicles, home and so on.

Transfer of Risks:


Before we understand what is transfer of risk we must know what is meaning of the word transfer. The meaning of transfer is to move from one place to another, to covey property to another, or transfer any right/power/money/shares/liabilities or assets.

When we talk of liabilities one becomes much alert as everyone is eager to transfer the liabilities to someone else the particularly pecuniary liabilities. And what are those pecuniary liabilities. It may a debt due to a bank/others, liability of procuring health services, liability of accidental events or otherwise. Every type of liability is considered as a Risk.

The Insurance is a form of risk management. It is primarily used to transfer risks of loss in exchange for payment of certain amount known as premium. The insurer company is engaged in the business of selling the insurance, (willing to accept the risk) the person desirous of purchasing the insurance (willing to transfer the risks).

In simple words when one feels unsecured and wishes to get secured by payment of certain amount is known as transfer of risk. A person fearing attack on his life employees Body Guards and pays them the monthly salary is an attempt to secure himself for loss of his life. Likewise any uncertainty of economic loss is if secured by paying certain sum of amount to an insurance company is transferring of risk.


However the insurance rate is a factor used to determine the amount to be charged for a certain amount of insurance coverage. The insurance involves a pre known amount to be born by the insured in the form of fixed premium as per the terms and conditions of insurance agreement (say Insurance Policy). In exchange an insurance company promises to compensate the insured in case of loss. Such losses are compensated as per the terms of the insurance policy purchased.

Why the risk is transferred:

The risk that an individual or a any entity is not willing to bear is preferred to be transferred to another entity. In brief it is called insurance. In exchange for payment of an agreed amount say premium the insurer agrees to indemnify the insured for losses that result from specified perils. Options and hedges also operate to transfer risk from one party to another.

In some instances the counter parties may be entities specially established to engage in the hedging or opinion trading, but in many instances they will be entities whose risk arises from the opposite movement in a price or volume of supply. Incase of infrastructure projects there are many mechanisms existing for transfer of risk arising from the perceived uncertainties.