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Classification of Risks

Here we discuss about the Classification of Risks in detailed.

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The distinction between insurable risk and non-insurable risks, has been made and explained by Prof. Knight. According to him, not all types of risks cause uncertainty and give rise to profit. It is only non-insurable risks which create uncertainty and therefore are causes of profit.
Now we will discuss Insurable Risk and Non-insurable risks, one by one in detailed.
  1. Insurable Risks : These are those risks which can be insured against on the payment of a fixed premium. For eg- risk of fire, theft, accident etc. The entrepreneur makes a suitable provision for such risks by taking out an insurance policy and paying a fixed premium on it. The amount of insurance premium is included in the cost of production. Insurable risks, do not create any uncertainty and as such they do not give rise to profit.
  2. Non-Insurable Risks : There are risks which cannot be insured against and as such have to be borne by the entrepreneur himself. This type of risks relate to his decision regarding price and output of the product as also on the judgment relating to the anticipated changes in the economy. 
For eg- the entrepreneur has to take such decisions as to whether it will pay him to increase or decrease the output of his product, whether it will pay him to introduce a new product, whether it will pay him to adopt a new technique or a new process of production and so on.
He has also to guess what the demand conditions will be, what changes will take place in the income of the people, whether there is the likelihood of prevailing boom conditions or trade depression; what are the likely changes in the Government's economic policy, how the international economic and political situation is likely to develop etc.
All these non-insurable because no insurance company will be prepared to insure the entrepreneurs against such risks. It is clear, Non-Insurable risks create uncertainty and give rise to profit.
Classification of Risks
Insurable Risks
Non-Insurable Risks
Insurable Risks do not create any uncertainty and do not give rise to profit
Non-insurable risks create uncertainty gives rise to profit
Classification of Risks.
Tech writer at NewsandStory