We now turn our attention to the classes into which risk can be placed. This is different from scrutinizing the actual idea of risk, we are now looking at the whole concept of risk and grouping together similar classes of risk. Of the many classes, we will look at three.
Financial and non-financial risks
A financial risk is one where the outcome can be measure() 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 negotiation 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. There may or may not be financial implications but in the main the outcome is not measurable financially but by other, more human, criteria.
Pure and speculative risks
Pure risks involve a loss or, at best, a break-even situation. The outcome can only be unfavourable to us, or leave us in the same position as we enjoyed before the event occurred. The risk of a motor accident, fire at a factory, theft of goods from a store, or injury at work are all pure risks with no element of gain:
The alternative to this is speculative risk, where there is the chance of gain. Investing money in share is a good example. The investment may result in a loss or possibly a break-even position, but the reason it was made was the prospect of gain.