Page 28 - DCOM309_INSURANCE_LAWS_AND_PRACTICES

Unit 2: Risk and Insurance

Heavy losses due to embezzlement and fraud by employees. Notes
Passing of trade secrets to competitors.
Poor industrial relations leading to frequent stoppages of work.

Environmental Risks

You will find it interesting to note that firms run risks of legal, social, political, and economic
environment in which they operate. Changing social norms can interrupt a firm’s operations in
many ways; for example, bad and complacent attitudes to work, pilferage, and wage differentials.
Political changes may result into increased government intervention in employment, marketing,
investment and other policies, and also sometime may lead to nationalization or the expropriation
(acquire without compensation) of business assets.
Also society and government are becoming increasingly aware of the damage and injury caused
by the release of pollutants into the air and the disposal of industrial wastes on land and into
water bodies. Today, industrial firms run the risk of heavy fines if they violate pollution laws,
even accidentally.
Thus, occurrence of some environmental events may result in either gain or loss, whereas others
cause only loss. Some events are the result of human behaviour, others are beyond human
control.

Changes in the Above Classifications

Unemployment, once upon a time, was looked upon as the fault of the individual concerned. It
may have arisen out of his laziness, lack of training or a number of other reasons and it was very
much a particular risk. With the passage of time, the view of society has changed and today,
most people would agree that unemployment arises out of some malfunctioning of the economic
system.
In this way, the risk is claimed to be one of a fundamental nature, not due to any one individual
and it is also widespread in its consequences.
When a risk is identified as being of a fundamental nature, the Government normally has to take
note of it and has to step in with some scheme to provide compensation for victims.

Example: By means of unemployment benefit or generation of employment/ self-
employment through various schemes.

Classification by Size of Loss

You will find out that losses can be classified according to severity of potential loss for the
individual or firm exposed to loss. Losses can be classified as follows:

Class I: Losses that do not disturb a firm’s basic finances;
Class II: Losses that necessitate raising additional finance by borrowing or a share issue;
Class III: Larger losses which might bankrupt the firm.
Whereas it may be possible for a firm to handle internally Class I and even Class II risks,
normally Class III losses can only be handled by transferring them, usually to an insurer.

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