Name: Raj Vardhan Agarwal

Course : BBA.LLB(H)
Enrolment No: A90821517066
Subject : Insurance Law

PROJECT ON CONCEPT OF RISK IN INSURANCE LAW

 INTRODUCTION

As per Cambridge Dictionary a Insurable risk Situation is “ a situation that an insurance

company will protect you against because it is possible to calculate how likely it is to happen,
how much damage it will cause, etc” .
Insurance is a means of protection from financial loss. It is a form of risk management primarily
used to hedge against the risk of a contingent, uncertain loss.
An entity which provides insurance is known as an insurer, insurance company, or insurance
carrier. A person or entity who buys insurance is known as an insured or policyholder.

The insurance transaction involves the insured assuming a guaranteed and known relatively
small loss in the form of payment to the insurer in exchange for the insurer's promise to
compensate the insured in the event of a covered loss. The loss may or may not be financial, but
it must be reducible to financial terms, and must involve something in which the insured has an
insurable interest established by ownership, possession, or preexisting relationship. The insured
receives a contract, called the insurance policy, which details the conditions and circumstances
under which the insured will be financially compensated. The amount of money charged by the
insurer to the insured for the coverage set forth in the insurance policy is called the premium. If
the
insured experiences a loss which is potentially covered by the insurance policy, the insured
submits a claim to the insurer for processing by a claims adjuster.

Types of Risk
There are different types of risk. The most important types of risk include:
1. Pure Risk
2. Speculative Risk
3. Particular Risk
4. Fundamental Risk
5. Static Risk
6. Dynamic Risk.
1 . PURE RISK
Pure risk is a situation that holds out only the possibility of loss or no loss or no loss. For
example, if you buy a new textbook, you face the prospect of the book being stolen or not being
stolen. The possible outcomes are loss or no loss. Also, if you leave your house in the morning
and ride to school on your motorcycle you cannot be sure whether or not you will be involved in
an accident, that is, you are running a risk. There is the uncertainty of loss. Your motorcycle may
be damaged or you may damage another person’s property or injured another person. If you are
involved in any one of these situations, you will suffer loss. But if you come back home safely
without any incident, then you will suffer no loss. So in pure risk, there is only the prospect of
loss or no loss. There is no prospect of gain or profit under pure risk. You derive no
gain from the fact that your house is not burnt down. If there is no fire incident, the status quo
would be maintained, no gain no loss, or a break-even situation. Therefore, it is only the pure
risks that are insurable.
Different Types of Pure Risk
Both the individual and business firms face different types of pure risks that pose great threat to
their financial securities. The different types of pure risks that we face can be classified under
any one of the followings:
(i) Personal risks
(ii) Property risks
(iii) Liability risks

Personal Risks
Personal risks are those risks that directly affect an individual.
Personal risks detrimentally affect the income earning power of an individual. They involve the
likelihood of sudden and complete loss of income, or financial assets sharp increase in expenses
or gradual reduction of income or financial assets and steady rise in expenses. Personal risks can
be classified into four main types:
1. Risk of premature death
2. Risk of old age
3. Risk of sickness
4. Risk of unemployment
Risk of Premature Death
It is generally believed that the average life span of a human being is 70 years.
Therefore,anybody who dies before attaining age 70 years could be regarded as having died
prematurely.
Premature deaths usually bring great financial and economic insecurity to dependants. In most
cases, a family breadwinner who dies prematurely has children to educate, dependants to
support, mortgage loan to pay. In addition, if the family bread-winner dies after a protracted
illness, then the medical cost may still be there to settle and of course the burial expenses must
have to be met. By the time all these costs are settled, the savings and financial assets of the
family head may have been seriously depleted or possibly completely spent or sold off and still
leaving a balance of debt to be settled.
The death of family head could render some families destitute and sometimes protracted illness
could so much drain the financial resources of some families and impoverish them even before
the death of the family breadwinner.
When a family breadwinner dies, the human-life value of the breadwinner would be lost
forever.This loss is usually very considerable and creates grate financial and economic
insecurity. Whatis a human life value? A human life value is the present value of the share of the
family in the
earnings of the family head.

Risk of Old Age

The main risk of old age is the likelihood of not getting sufficient income to meet one’s financial
needs in old age after retirement. In retirement, one would not be able to earn as much as before
and because of this, retired people could be faced with serious financial and economic insecurity
unless they have build up sufficient savings or acquired sufficient financial assets during their
active working lives from which they could start to draw in old age.
Even some of the workers who make sufficient savings for old age would still have to contend
with corrosive effect of inflation on such savings. High rate of inflation can cause great financial
and economic distress to retired people as it may reduce their real incomes.
Risk of Poor Health
Everybody is facing the risk of poor health. It is only when people are healthy, that they can
meaningfully engage themselves in any productive activity an earn full economic income. Poor
health can bring serious financial and economic distress to an individual. For example, without
good health, nobody can gainfully engage himself in any serious economic undertaking an
maximized his economic income.
A sudden and unexpected illness or accident can result in high medical bills. Therefore, poor
health will result in loss of earned income and high medical expenses. And unless the person has
adequate personal accident and health insurance cover or has made adequate financial
arrangements for income from other sources to meet these expenses, the person will be
financially unsecured.

Risk of Unemployment
The risk of unemployment is a great threat to all those who are working for other people or
organizations in return for wages or salaries. The risk equally poses a great threat to all thosewho
are still in school or undergoing courses of vocational training with the notion of taking up
salaried job after the training period. Self-employed persons, whose services or products are no
longer in demand, could also be faced with the problem of unemployment.Unemployment is a
situation where a person who is willing to work and is looking for work to do cannot find work
to do. Unemployment always brings financial insecurity to people. This financial insecurity
could come in many ways, among which are:
1. The person would lose his or her earned income. When this happens, he will suffer some
financial hardship unless he has previously built up adequate savings on which he can now
start to draw.
2. If the person fails to secure another employment within reasonable period of time, he may
fully deplete his savings and expose himself to financial insecurity.
3. If he secures a part-time job, the pay would obviously be smaller than the full-time pay and
this entails a reduction of earned income. This would also bring financial insecurity.
SPECULATIVE RISK
Speculative risk is a situation that holds out the prospects of loss, gain, or no loss no gain
(breakeven situation). Speculative risks are very common in business undertakings. For example,
if you establish a new business, you would make a profit if the business is successful and sustain
loss if the business fails.
If you buy shares in a company you would make a gain if the price of the shares rises in the stock
market, and you would sustain a loss if the price of the shares falls in the market. If the price of
the shares remains unchanged, then, you would not make a profit or sustain a loss. You
breakeven. Gambling is a good example of speculative risk. Gambling involves deliberate
creation of risk in the expectation of making a gain. There is also the possibility of sustaining a
loss. A person betting $500 on the outcome of the next weekend English Premier League Match
faces both the possibility of loss and of gain and of no loss, no gain. Most speculative risks one
dynamic risk with the exception of gambling situations.Other examples of speculative risk
include taking parts in a football pool, exporting to a new market, betting on horse race or motor
race.
Speculative risks are no subject of insurance, and then are therefore not normally insurable. They
are voluntarily accepted because of their two-dimensional nature of gain or loss.

Liability Risks
Most people in the society face liability risk. The law imposes on us a duty of care to our
neighbour and to ensure that we do not inflict bodily injury on them. If anyone breaches this duty
of care, the law would punish him accordingly. For example, if you injure your neighbour
or damage his property, the law would impose fines on you and you may have to pay heavy
damages.
Unfortunately, one can be found liable for breach of duty of care in different ways and the best
security seems to be the purchase of liability insurance cover.
Liability Risks have two peculiarities:
(i) Under liability risk, the amount of loss that can be involved has no maximum upper limit.
The wrong doer can be sued for any amount. For example, while riding on your bicycle valued
$500, you negligently cause serious bodily injury to another person, that person can sue you for
any amount of money, say $5000, N10,000 or even more depending on the nature of the injury.
In contrast, if the bicycle value at $500 is completely damaged by another person, the maximum
amount of compensation (indemnity) that would be paid to you for the loss of the bicycle is jus
$500, that is, the actual value of the bicycle.
ii. Under liability risks your future income and assets may be attached to settle a high court fines
if your present income and assets are inadequate to pay the judgment debt. When this happens,
your financial and economic security would be greatly endangered.
Property Risks
Property owners face the risk of having their property stolen, damaged or destroyed by various
causes. A property may suffer direct loss, indirect loss, losses arising from extra expenses of
maintaining the property or losses brought about by natural disasters.
Natural disasters such as flood, earthquake, storm, fire etc can bring about enormous property
losses as well as taking several human lives. The occurrence of any of these disasters can
seriously undermine the financial security of the affected individual, particularly if such
properties are not unsecured.
Direct Loss
Direct loss is that loss which flows directly from the unsecured peril. For example, if you insure
your house against fire, and the house is eventually destroyed by fire, then the physical damage
to the property is known as direct loss.
Indirect Loss or Consequential Loss
Indirect or consequential loss is a loss that arises because of a prior occurrence of another loss.
Indirect loss flows directly from an earlier loss suffered. The loss is the consequence of some
other loss. It arises as an additional loss to the initial loss suffered. For example, if a factory that
has a fire policy suffers a fire damage, some physical properties like building, machinery maybe
destroyed. The loss of these properties flows directly from the insured peril (fire). The physical
damage to the properties is known as direct fire loss.
But in addition to the physical damage to the properties, the firm may stop production for several
months to allow for the rebuilding of the damaged of the premises and replacement of damaged
equipment, during which no profit would be earned.
This loss of profit is a consequential loss. It Is not directly brought about by fire but flows
directly from the physical damage brought about by fire and hence indirectly from the fire
incident. Other examples of consequential loss are the loss of the use of the building and the loss
of a market.

Extra Expenses
Alternative arrangement may have to be made to rend a temporary premises, pending the repairs
or reinstatement of the damaged building, and it may also be necessary to rent, hire or lease a
machine in order to keep production going so as not to disappoint customers and in the process
lose market to competitors. The expenses incurred in securing the alternative premises, an
renting, hiring or leasing a machine are referred to as extra expenses. These expenses may not
have been insured if there has been no fire damage.
FUNDAMENTAL RISK
A fundamental risk is a risk which is non-discriminatory in its attack and effect. It is impersonal
both in origin and consequence. It is essentially, a group risk caused by such phenomena like bad
economy, inflation unemployment, war, political instability, changing customs, flood,draught,
earthquake, weather (e.g. harmattan) typhoon, tidal waves etc. They affect large proportion of the
population and in some cases they can affect the whole population e.g. weather(harmattan for
example). The losses that flow from fundamental risks are usually not caused by a particular
individual and the impact of their effects falls generally on a wide range of people or on
everybody. Fundamental risk arise from the nature of the society we live in or from some natural
occurrences which are beyond the control of man.
The striking peculiarity of fundamental risk is that is incidence is non-discriminatory and falls on
everybody or most of the people. The responsibility of dealing with fundamental risk lies with
the society rather than the individual. This is so because, fundamental risks are caused by
conditions which are largely beyond human’s control and are not the fault of anyone in
particular. The best means of handling fundamental risk is the social insurance, as private
insurance is very inappropriate. Although, it is on record that some fundamental risk, like
earthquake, flood are being handle by private insurance.
PARTICULARS RISKS
A particular risk is a risk that affects only an individual and not everybody in the community.The
incidence of a particular risk falls on the particular individual affected. Particular risk has its
origin in individual events and its impact is localized (felt locally). For example, if your textbook
is stolen, the full impact of the loss of the book is felt by you alone and not by the entire
members of the class. You bear the full incidence of the loss. The theft of the book therefore is a
particular risk.If your shoes are stolen, the incidence of the loss falls on you and not on any other
person.
Particular risks are the individual’s own responsibility, and not that of that society or community
as a whole. The best way to handle particular risk by the individual is the purchase of insurance
cover.
STATIC RISK
Static risks are risks that involve losses brought about by irregular action of nature or by
dishonest misdeeds and mistakes of man. Static losses are present in an economy that is not
changing (static economy) and as such, static risks are associated with losses that would occur in
an unchanging economy. For example, if all economic variables remain constant, some people
with fraudulent tendencies would still go out steal, embezzle funds and abuse their positions. So
some people would still suffer financial losses. These losses are brought about by causes other
than changes in the economy. Such as perils of nature, and the dishonesty of other people.Static
losses involve destruction of assets or change in their possession as a result of dishonesty.
Static losses seem to appear periodically and as a result of these they are generally
predictable.Because of their relative predictability, static risks are more easily taken care of, by
insurance cover then are dynamic risks. Example of static risk include theft, arson assassination
and bad weather. Static risks are pure risks.
DYNAMIC RISK
Dynamic risk is risks brought about by changes in the economy. Changes in price level, income,
tastes of consumers, technology etc (which is examples of dynamic risk) can bring about
financial losses to members of the economy. Generally dynamic risks are the result of
adjustments to misallocation of resources. In the long run, dynamic risks are beneficial to the
society. For example, technological change, which brings about a more efficient way of mass
producing a higher quality of article at a cheaper price to consumers than was previously the
case, has obviously benefited the society.
Dynamic risk normally affects a large number of individuals, but because they do not occur
regularly, they are more difficult to predict than static risk.

ESSENTIAL CONDITIONS FOR A RISK TO BE INSURED

1. The loss must be due to chance. Regular recurring losses such as shoplifting in a supermarket
are built into the price and would not be insurable as it is not fortuitous.
2. The loss must be definite and measurable. This means that there must be bills to establish
"proof of loss," not just casual references.
3. The loss must be predictable, meaning it must be of such a nature that its frequency and
average severity can be readily determined to establish the required premium.
4. The loss cannot be catastrophic. All individual losses are personal catastrophes. The reference
here is to national or area disasters, such as floods, riots, wars, earthquakes, etc.These events will
often have coverage amount limitations in the property and casualty insurance areas.
5. The loss exposures must be large. To avoid adverse selection, there must be enough exposure
to losses for the frequency to be predictable and to be grouped for the purpose of establishing
rates.
6. The loss exposures must be randomly selected. Concentration of risks by area, age groups,
occupations, economic status, etc., can lead to adverse selection.
 Conclusion

Risk and their critical analysis with their relation to each other. I have come to realize the fact
that the principle of insurance and its origin is dependent on the existence of risk. If the
possibility of risk was 0% then there would be no need for a insurance to arise. But
unfortunately, there is a a possibility of risk in domains such as life, goods, transportation , etc
and henceforth there is a need for a mechanism such as insurance to solve it .
One thing that needs to be understood is the fact that insurance is a service . And just like any
good or service it’s demand depends on the fact that there is a need for insurance which in turn is
a result of the element of risk.
Risks are unpredictable .There is no way to compensate the person insured to be in the exactly
same position as he was before the calamity happened but insurance contracts try to almost put
the person insured in a similar position as he was before the happening of calamity. Insurance is
also profitable as a business because even tough there is possibility of risk in all ventures one
cannot ignore the fact that it is a rare occasion that all insured parties would ask for a claim at
once. It can only happen in extreme situations such a floods, earthquakes , etc.
Therefore it is a profitable business as generally very few people file for a claim as only few are
affected by risk during general course.
Therefore I would conclude by stating that we are lucky to be a time wherein insurance exists as
a service because it is not only profitable as a business to exist but it is also good for the society
as a huge section of the general public is now insured upto a high extent from prominent risks
such as injury, life , transportation , etc.
 BIBLIOGRAPHY

Books ,
1. Avtar Singh , Law of Insurance
2. B.C.Mitra , Law Relating to Marine Insurance
3. M,C. Gee , Modern Law of Insurance