Insurance is a business of taking risks from the customer to the insurance company to feel comfortable joining the insurance program. Insurance must be smart in controlling risks so that the business is profitable so that customers also feel comfortable joining the programs offered. Before getting to know more about the types of risks that exist in the insurance industry, customers need to first understand the benefits of insurance itself. Here is the full review.
Understanding and Benefits of Insurance
Insurance or what is often referred to as coverage is described as an agreement for the insurer that binds himself to the insured by receiving a premium in order to provide him with compensation for damage or loss due to an uncertain event.
So we can define insurance as an activity of transferring risk from one party to another in which there are rules and principles that are obeyed by both parties.
When viewed from an economic standpoint, insurance can be interpreted as an activity of collecting funds that can later be used to compensate or cover losses to people who experience the event. Insurance has various benefits seen from its function. The main function of insurance is as a transfer of risk.
In addition, insurance also has a secondary function: to stimulate broad economic development, generate business interest, and control losses. Another function of insurance, which is an additional function, is as a means of invisible earnings and investment.
Definition of Risk and Its Relationship in the World of Insurance
Most people are still confused, what is the risk in insurance and how it is classified. Furthermore, there is often the question that what risks can be insured. If you are looking for an understanding of any of these, then you have read the right article.
Understanding the risks in insurance at least you will get an explanation of the following:
- Know the general definition of risk
- Understand what risks are in insurance in general
- Identify what risks can be covered through insurance
- Understand risk management so that the objectives and functions of insurance can be clearly obtained.
Especially for risk management, this is important and must be known by individuals and business actors. Because without risk management it is impossible for someone to minimize the risk themselves.
In general, the insurer views risk as uncertainty. Of course, of the various kinds of uncertainty, you must know which types of risk can be insured. This is because the risk is the object of the sale of insurance companies. By knowing the variants and types of risks, you can then choose which risks can or cannot be insured.
General Definition of Risk
More broadly, risk is defined as a danger, result, or consequence that may occur due to an ongoing process or certain events that will occur in the future. Risk is something that is always faced by humans and is very uncertain. Therefore, insurance views risk as an uncertainty.
In insurance, risk can be caused by personal activity or business activity. Examples of personal risks are illness, accident, or financial risk caused by the death of a person. Examples of business risks are bankruptcy, loss, or damage caused by various things such as fire, natural disasters, etc. This also applies to health insurance, car insurance, or travel insurance.
Classification and Types of Risk in Insurance Industry
In risk insurance is classified into several types, namely:
The characteristic of pure risk is that if it does happen, it will definitely cause losses and if it doesn’t, it will not cause a loss or will not cause a profit. This means that in terms of pure risk, losses must occur. Examples of this risk are fire, accident, bankruptcy, and so on.
Contrary to pure risk, the speculative risk still contains two possibilities if the event that is considered risk does occur. For example, when investing in stocks on the stock exchange, the event or investment process will pose a speculative risk, that is, on the one hand, there is a possibility of financial gain and on the other hand there is a risk of loss.
Particular Risk is a risk whose impact or cause only affects the local (personal) environment both in quantity and quality. Examples are unemployed or a thief. When someone steals the risk only affects that individual.
In contrast to Particular Risk, fundamental risk will have a very broad impact. This risk can be caused by certain factors or parties such as natural disasters, government policies, etc.
Individual risk is a variety of possibilities that occur in everyday life that can affect a person’s financial capacity, wealth, and responsibility risk. Individual risk can be divided into several groups: personal risk, property risk, and liability risk. In personal risk, it is often associated with the influence of a thing or possibilities that will directly impact certain individuals, such as a person’s financial condition. Examples of personal risks are physical disability, loss of job, death, and so on.
Is a loss related to the ownership of an object due to loss, theft, or damage. Asset risk can be further categorized into two types, namely direct losses and consequential losses.
It is a risk of responsibility that we must give to other parties. In other words, this risk is to bear other people’s losses due to the actions or things we cause. For example, in the event of an accident when you hit another person, this is called liability risk.
Risks that get protection from insurance companies
Regarding the various risks described above, then there are some questions that often arise regarding insurance. Are all the above risks transferable to a reputable insurance company? So the answer is no. Only fundamental risks and pure risks can be insured under certain conditions, as follows:
- Risk has to be accidental and unpredictable
- The risks that can be borne must be homogeneous and common
- The impact of these risks can be assessed in monetary or financial terms
- There must be an object that is insured, for example, property, illness, loss, and so on.
- The insured object is not against the prevailing rules and public interest. For example, drugs cannot be used as an object of insurance.
- The premium charged must be in accordance with the level of risk insured. Although coverage may exceed the actual price or interest, it is only within a certain limit (double insurance).
The Importance of Risk Management in the Insurance Industry
After we understand insurance along with the risks that can be insured, in fact, the process of dealing with these risks is known as risk management. Risk management is needed to classify the types of risk, the level of losses caused, and how to determine preventive measures in dealing with these risks.
Risk management can be illustrated from the simplest things to complex ways for preventive measures on a large scale. In simple cases in everyday life, locking the car door or house door is a risk management step that anyone can take. Locking your car means that you can classify the risks that may occur when you park the car, so you take a preventive step by locking the car.
In a large scheme, risk management begins with risk identification and risk evaluation to determine the frequency and level of possible losses. After that, a risk control procedure is carried out to find out what losses can be caused whether it is financial loss or physical loss. After that, there are many steps that can be taken such as minimizing risk, transferring risk (insurance), or eliminating that risk altogether.
Understand All BEFORE Using
Understanding the types of risks and benefits of joining an insurance program will make you more careful in living your life and feel comfortable joining an insurance program that suits your needs. Don’t be careless and quickly lulled by the advantages and facilities of each insurance product offered, if you don’t want to suffer losses because you have an insurance product that doesn’t suit your needs.
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