Nature of Business Risks in Insurance

Nature of Business Risks

Business risks can be understood in terms of their peculiar characteristics:

i. Business Risks Arise Due to Uncertainties

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.

ii. Risk is an Essential Part of Every Business

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.

iii. Degree of Risk Depends Mainly Upon the Nature and Size of Business

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.

iv. Profit is the Reward for Risk Taking:

‘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.