Types of Business Risks
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.
Example: 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.
Example: 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 determined.
Example: Company 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.