Financial and Non-financial Risks




Financial and Non-financial Risks
A financial risk is one where the outcome can be measured in monetary terms.
This is easy to see in the case of material damage to property, theft of property or lost business profit

following a fire. In cases of personal injury, it can also be possible to measure financial loss in terms of a
court award of damages, or as a result of negotiations between lawyers and insurers. In any of these cases,
the outcome of the risky situation can be measured financially.
There are other situations where this kind of measurement is not possible. Take the case of the choice of a
new car, or the selection of an item from a restaurant menu. These could be construed as risky situations,
not because the outcome will cause financial loss, but because the outcome could be uncomfortable or
disliked in some other way. We could even go as far as to say that the great social decisions of life are
examples of non-financial risks: the selection of a career, the choice of a marriage partner, having children.
There may or may not be financial implications, but in the main the outcome is not measurable financially but
by other, more human, criteria.
Insurance is primarily concerned with risks that have a financially measurable outcome. But not all risks are
capable of measurement in financial terms. One example of a risk that is difficult to measure financially is the
effect of bad publicity on a company - consequently this risk is very difficult to insure.
However, this is a good point to stress how innovative some insurers are in that they are always looking for
ways to provide new covers, which the customers want. The difficult part is to be innovative and still make a
profit.
Now after understanding meaning of Risk and their classification, we will discuss Risk Management,
Risk Analysis, Risk Planning, Risk Control and Insurance and Reinsurance as a risk Transfer
mechanism.

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