Risk and Insurance: Definition, Types

Risk Definition and TypesThe risk is a concept which relates to human expectations.

It denotes a potential negative impact on an asset or some characteristic of value that may arise from some present process or some future event.




Where assets are priced by markets, all probabilities and impacts are reflected in the market price, and risk, therefore, comes only from the variance of the outcomes.

According to the Dictionary;

  • Risk refers to the probability that something unpleasant or dangerous might happen.
  • Risk is a condition in which there is a possibility of an adverse deviation from the desired outcome that is expected or hoped for.

For understanding the risk, we should know these terms which are related to the concept of risk;

What is the Definition of Chance



What is the Definition of Risk

This is a term which refers to the probable disadvantageous, undesirable or unprofitable outcome of a fortuitous event, an event which is not desired but taking place.

For example,

We usually say the risk of death and not the risk of survival as death is something which is never desired.

What is the Definition of Probability


What is the Definition of Uncertainty


Uncertainty refers to a state of mind characterized by doubt, based on the lack of knowledge about what will or what will not happen in the future.

Very often the meaning of Risk and uncertainty gets mixed, but there are fundamental differences between them;

Risk vs. Uncertainty

  • Uncertainty is often confused with risk. Uncertainty refers to a situation where the outcome is not certain or unknown.Uncertainty refers to a state of mind characterized by doubt, based on the lack of knowledge about what will or what will not happen in the future.
  • Uncertainty can be perceived as opposite of certainty where you are assured of outcome or what will happen.Accordingly, some weight or probabilities can be assigned to risky situations, but uncertainty, the psychological reaction ten the absence of knowledge lacks this privilege.
  • Uncertainty being a perceptual phenomenon implies different degrees to different person.For example: Assume a situation where an individual has to appear for the first in the newly introduced insurance examination.
  • An individual student had undergone training in insurance.
  • An individual with training or experience in insurance A’s perception towards uncertainty (of performance in the examination) is different from that of B. Nonetheless, in both situations, the outcomes that are the questions which will be asked in the examination are different.


Read: Methods of Eliminating and Spreading the Risk

The business of risk management necessarily deals with the Control and management of risk, i.e., the effects of fortuitous events which are never expected or desired but taking place to our detriment.

One thing is clear that there is no single definition of risk. Economists, behavioral scientists, risk theorists, statisticians, and actuaries each have their concept of risk.


Risk traditionally has been defined regarding uncertainty.

Based on this concept, the risk is denied here as uncertainty concerning the occurrence of a loss.



For a more clear definition of the risk, the authors and experts looked at the risk objectively and subjectively.

Objective Risk

Objective risk (also called the degree of risk) is defined as the relative variation of actual loss from expected loss.

For example,

Assume that a property insurer has 10,000 houses insured over a long period and. On average, 1 percent, or 100 houses, burn each year. However, it would be rare for exactly 100 houses to burn each year.

In some years, as few as 90 houses may burn; in other years as many as 110 houses may burn. Thus: there is a variation of 10 houses from the expected number of 100 or a variation of 10 percent. This relative variation of actual loss from expected loss is known as objective risk.




The objective risk is now 100/1000 or 1 percent. Thus, as the square root of houses increased from 100 in the first example to 1000 in the second example (10 times), the objective risk declined to one-tenth of its former level.





Subjective Risk

The subjective risk is defined as uncertainty- based on a person’s mental condition or state of mind.

For example,









  • A merchant is running the risk of various maritime perils.
  • An organization handling money matters is running the risk of possible defalcation by employees as well as a loss by outside miscreants.
  • A dependent family is running the risk of financial insolvency arising out of the premature death of the breadwinner.

The risk is, therefore, incidental to life. Some people live dangerously others exercise extreme caution.




In this study, certain terminologies are required to be properly understood because of their differences with each other and at the same time because of their necessary application.

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