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1/6 W01/March 2017 Award in General Insurance
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Chapter Let us look at some examples of financial risks to help us understand this concept:

• Accidental damage to a motor car: the financial value of the risk is the cost of repairing or replacing
the vehicle.
• Theft of property: the financial value of the risk is the stolen property’s current market value. This is
measurable in financial terms and would not include sentimental value because that is not precisely
measurable in financial terms.
• Loss of business profits following a fire: this risk is measurable since comparisons can be made to
similar trading periods to devise a fair estimate of the loss to be paid by the insurer as compensation.
• Legal liability to pay compensation for personal injury to others: for example, a court measures the
value of damages applicable for the loss of a leg against compensation payments that have been
made previously in similar situations. Usually a standard formula is applied to calculate damages that
will take account of financial circumstances as well as the injury itself.

C2 Pure and speculative risks

There are many situations in life when we speculate with a view to making some kind of gain. An obvious
example is gambling. There are also situations such as investing in the stock market or starting up a new
business that fall into this category. Each of these aims to make a gain, but carries the possibility of
break-even or failure. Consequently, although there are some aspects of business activity that can be
insured, this does not include things such as misreading the market or a business failing because of
local competition. Insurance does not apply to speculative risks.
Pure risks, on the other hand, are those where there is the possibility of a loss but not of gain, and where
Pure risks are where
there is the possibility the best that we can achieve is a break-even situation. Travelling home in a car is a good example: we
of loss but not of gain hope to arrive home safely, of course, but the possibility exists that there might be an accident and the
car could be damaged or someone get injured. It is these types of risk that are generally insurable.

Consider this…
Think of two pure risks which a company might be exposed to. Reference copy for CII Face to Face Training

You may have already thought of these, but here are some examples of pure risks which are measurable
in financial terms:

• The risk of fire: it could damage or destroy property or cause an interruption to the running of the
business.
• The risk of machinery breakdown: this could lead to actual damage or business interruption.
• The risk of injury to employees at work: if injury is caused by the negligence of the company, a court
may award damages and costs.

C3 Particular and fundamental risks
There are some risks that occur on such a vast scale that they are uninsurable; these are called
fundamental risks. Take, for example, the risk of earthquake in a region known to be prone to such risks,
or famine, economic recession or a more general risk of war. However unlikely the risk of war may seem,
its effects bring a catastrophe potential that insurers are not willing to carry. We can, therefore, define
fundamental risks as those that arise from social, economic, political or natural causes and are
widespread in their effect. As we have seen, non-financial or speculative risks are uninsurable as a
matter of principle. In contrast, the problem with fundamental risks is that it is often a lack of willingness
or capacity on the part of insurers that causes such risks to be uninsurable.
It is not an easily defined category and there seem to be, on the face of it, many exceptions to the
general rule. Just think of the terrorism cover provided on the World Trade Center in the USA, or the fact
that marine insurers will often grant war risks cover for vessels and cargo, or even the fact that it is
possible to be insured for earthquake cover in California. Nevertheless, the fact remains that risks that
tend to affect whole countries, regions or communities are classified as fundamental and, therefore,
generally, uninsurable.
Two risks automatically categorised in this way for non-marine policies are war risks and nuclear risks.
Consider this…
Think about some of the widespread natural disasters, wars and economic recessions of the past 15 years. What
might the claims impact have been on the insurance industry?