Insurance Companies have to run their businesses profitably and therefore they do not accept all risks but only those they can operate profitably. “Risk classification is the process by which insurers estimate the expected claim cost for different buyers and charge premiums that vary according to expected claim cost.” – Harrington and Niehaus definition 1999.

Risk can be classified in various ways. When dealing with a speculative risk there is a possibility of a loss, but there could also be a gain. In the case of Pure risk a loss or no loss is possible, there is no possibility of any gain. We also have fundamental risks – these will affect a large section of the population, even the whole world, such as war or an economic recession. Particular risks are restricted events such as car accidents and could be prevented by individual behaviour.

Pure risk is further classified as personal, property and liability risks. These are the risks we will find in short term insurance such as car insurance. Examples of personal risks include injury or death; property risk could be a house or car and liability risks result from the actions or failure to act of a person.