Risk – What is it?

Risk – What is it?

Risk – a definition

probability, possibilityor threat of damageinjuryliabilityloss, or other negative occurrence that is caused by external or internal vulnerabilities, and that may be neutralized through pre-emptive action.


The types of risks that we at CPR Insurance Services deal in are pure risks. These are defined as a situation where there is a chance of either loss or no loss, but no chance of gain; for example either a building will burn down or it won’t. Only pure risks are insurable because otherwise (where the chance of the occurrence of a loss is determinable) insurance is akin to betting and the insured may stand to gain from it a situation contrary to the most fundamental concept of insurance which is to be indemnified for your loss. These can also be called absolute risks.


Insurance Risks: A situation in which the probability distribution of a variable(such as burning down of a building) is known but its mode of occurrence or actual value(whether the fire will occur at a particular property) is not.

A risk is not an uncertainty(where neither the probability nor the mode of the occurrence is known), a peril(cause of loss), or a hazard (agent or condition that makes the occurrence of a peril more likely or more severe).


Then there are the other uses for the term “Risk”.

Business risks

The probability of loss inherent in an organization’s operations and environment(such as competitionand adverse economic conditions) that may impair its ability to provide returns on investment. Business risk plus the financial risk arising from use of debt(borrowed capital and/or trade credit) equal total corporate risk.

Finance Risk: The probability that an actual return on an investment will be lower than the expected return.

Financial risk is divided into the following general categories:

(1) Basis risk. Example: Changes in interest rates will cause interest-bearing liabilities (deposits) to reprice at a rate higher than that of the interest-bearing assets(loans).

(2) Capital risk. Example: Losses from un-recovered loans will affect the financial institution’s capital baseand may necessitate floating of a new stock(shareissue.

(3) Country risk. Example: Economic and political changes in a foreign country will affect loan-repayments from debtors.

(4) Default risk. Example: Borrowers will not be able to repay principal and interest as arranged (also called credit risk).

(5) Delivery risk. Example: Buyer or seller of a financial instrument or foreign currency will not be able to meet associated delivery obligations on their maturity.

(6) Economic risk. Example: Changes in the state of economy will impair the debtors’ ability to payor the potential borrower’s ability to borrow.

(7) Exchange rate risk. Example: Appreciation or depreciation of a currency will result in a loss or an naked-position.

(8) Interest rate risk. Example: Decline in net interest income will result from changes in relationship between interest income and interest expense.

(9) Liquidity risk. Example: There will not be enough cashand/or cash equivalents to meet the needs of depositors and borrowers. (

10) Operations risk. Example: Failure of data processing equipment will prevent the bank from maintaining its critical operationsto the customers‘ satisfaction.

(11) Payment system risk. Example: The payment systemof a major bank will malfunction and will hinder its payments.

(12) Political risk. Example: Political changes in a debtor’s country will jeopardize debt-service payments.

(13) Refinancing risk. Example: It will not be possible to refinance maturing liabilities (deposits) when they fall due, at economic cost and terms.

(14) Reinvestment risk. Example: It will not be possible to reinvest interest-earning assets at current market rates.

(15) Settlement risk. Example: Failure of a major bank will result in a chain reaction, reducing other banks’ ability to honor payment commitments.

(16) Sovereign risk. Example: Local or foreign debtor-government will refuse to honor its debt obligations on their due date.

(17) Underwriting risk. Example: New issue of securities underwritten by the institution will not be sold or its market price will drop.

Then the term can be used in other areas of Risks such as:


We are all risk takers. Some we can transfer away while others we need to handle or factor in to the activities we carry out. CPR are experts on Pure or Insurable Risks.