· Financial and Non-financial
· Static and Dynamic
· Fundamental and particular.
· Pure and speculative.
· Personal and business.
· Objective and subjective
1. FINANCIAL AND NON-FINANCIAL RISKS - the term risk, in its context, includes al those situations in which there is an exposure to adversity. Risk is financial where the adversity involves the financial loss and it is non-financial where no financial loss is involved.
2. STATIC AND DYNAMIC RISKS – Dynamic Risks result from changes in the economy e.g. changes in price levels, consumer tastes, income and output, and technology may cause a financial loss to some members. These risks may occasion financial loss to the population. However in the long term, they benefit society as they are consequences of adjustments to misallocation of resources. Dynamic risks occur without any precise degree of regularity and are therefore less predictable.
Static risks are those which involve losses whether or not there are changes in the economy e.g. dishonesty of other individuals, perils of nature. They do not benefit society and are generally predictable because they tend to appear over time with a reasonable degree of regularity. They involve either a destruction of the asset or a change in its possession and are thus not a source of gain to society.
3. FUNDAMENTAL AND PARTICULAR – Fundamental risks involve losses impersonal in nature both in origin and consequence, that is it is not caused by one individual and its impact generally falls on a wide range of people. Examples of such risks include war, inflation, changing customs, hurricanes, earthquakes and tidal waves. The first three arise out of the kind of society we have and the last three are attributable to some physical forces. A risk of an particular nature has its origin in its individual events and its impact is felt locally. Accidental damages to personal effects, theft of property and explosion of a boiler are examples of particular risks.
4. PURE AND SPECULATIVE RISKS – a pure risk refers to that situation that may result in one of two outcomes [a chance of loss]- either there is a loss or there is no loss (breakeven). Pure risks can be classified as personal, property, liability and risks arising from the failure of others. Speculative risks describe circumstances in which there is a possibility of loss or gain e.g. gambling and wagers. No benefit can emanate from an exposure to pure risks. Damage to one’s car by accident is an example of a pure risk. Either there is damage (i.e. an accident occurs) or there is no damage (the car is not involved in an accident).
Speculative risk refers to that situation that may result in one of three possible outcomes – either there is a loss or there is no loss or there is a gain. Those whom buy shares on the stock market face speculative risks. One may buy shares at shs 20 each and a year later they may be only worth shs. 15. On the other hand they may no have changed in value and could still stand at shs 20. Alternatively, they could have risen in value so that one could sell them at shs 25 each and make a profit.
Speculative risks are common in the business world. Launching a new product, fixing retail prices, exporting to a new market, etc are all forms of speculative risks because they hold the possibility of making a loss, breaking even, or making a profit. Similarly, pure risks are common. The factory may burn down, profit may be lost following a fire, and stock may be stolen. Should they not occur, it wouldn’t mean that the firm has gained. It would only have broken – even.
5. PERSONAL AND BUSINESS RISKS – To wrap it up, we can also say that risks could either be personal or business in nature. The former are those relating to an individual, for example, premature death, dependent old age, sickness or disability and unemployment. The latter are those relating to a business entity. They all have financial implications that are undesired by the business firm. Examples include the factory burning down, stock being stolen, production being hampered by strikes, etc.
6. OBJECTIVE AND SUBJECTIVE- an example is loss of property by theft. This risk is financial static, particular and pure in nature. Furthermore, it could either be personal or business.