Insurance covers various risks of
traders and others. Therefore the concept of risk need to be studied. The term
‘business risk’ refers to the possibility of inadequate profits or even losses
due to uncertainties or unexpected events. Risk is different from
Business risks can be understood in
terms of their peculiar characteristics:
Uncertainty refers to the lack of
knowledge about what is going to happen in the future. Natural calamities,
change in demand and prices, changes in government
policy, improvement in technology, are some of the examples of uncertainty
which create risks for business because the outcome of these future events is
not known in advance.
Every business has some risk. No
business can avoid risk, although the amount of risk may vary from business to
business. Risk can be minimized, but cannot be eliminated.
Nature of business (i.e. type of goods
and services produced and sold) and size of business (i.e., volume of
production and sale) are the main factors which determine the amount of risk in
a business. For example, a business dealing in fashionable items has a high
degree of risk. Similarly, a large-scale business generally has a higher risk
than what a small scale business has.
‘No risk, no gain’ is an age-old
principle which applies to all types of business. Greater the risk
involved in a
business, higher is the chance of profit. An entrepreneur
undertakes risks under the expectation of higher profit. Profit is thus the reward
for risk taking.
The business risks may be classified as
Speculative risks are the kind of risks
which have the possibility of gain as well as the possibility of loss. Such
risks are the result of market conditions. Favourable market conditions result
in gains whereas unfavourable market conditions result in losses.
Use of better technology helps to produce better quality products at cheaper
prices. This may increase the demand and thus result in higher profits.
Pure risks are the type of risks where
business suffers loss only if the risk occurs. Non- occurrence of such risks
leads to absence of loss.
Business may suffer loss only if fire, theft or strike occurs.
Insurable risks are the type of risks
where business can insure the probable losses by paying a predetermined premium
to an insurance company. At the time of loss the insurance company pays
compensation on the basis of agreed terms and conditions. Loss arising from
natural and physical risks can be insured as the probability of risk can be
can insure its stock against fire or theft and if it loses its stock due to
fire or theft in office, the insurance company pays compensation only upto a
extent of the value lost.
Losses arising from unforeseen natural
events, political changes or trade
cycles are called uninsurable risks. Loss due to earthquake or flood or
cyclone cannot be estimated and their
probability cannot be
calculated. Government directly takes care of the affected persons. Losses to
businesses due to policy decisions of
ruling political parties in a
country, or due to economic depression cannot be insured.
These uninsurable risk
events are called uncertainties. The concept of risk is different from uncertainty. During
uncertain events decisions cannot be taken.
Business risks arise due to a variety of
causes, which are classified as follows:
Human beings have little control over
natural calamities like flood, earthquake, lightning, heavy rains, famine, etc.
These result in heavy loss of life, property, and income in business.
Human causes include such unexpected
events like dishonesty, carelessness or negligence of employees, stoppage
of work due to power failure, strikes,
riots, management inefficiency, etc.
These include uncertainties relating to
demand for goods, competition, price, collection of dues from customers, change
of technology or method ofproduction, etc. Financial problems like rise in
interest rate for borrowing, levy of higher taxes, etc., also come under this
type of causes as they result in higher unexpected cost of operation of
These are unforeseen events like
political disturbances, mechanical failures such as the bursting of boiler,
fluctuations in exchange rates, etc. which lead to the possibility of business