Which types of risk do insurers commonly face?

Insurers primarily deal with two categories of risk: pure risk and speculative risk. Pure risk refers to situations that can only result in a loss or no loss, with no potential for gain. This includes risks such as property damage, liability claims, and natural disasters. Since insurance is designed to cover losses from unforeseen events, these are the types of risks that insurers typically assess and underwrite.

Speculative risk, on the other hand, involves the possibility of a loss or gain. Examples of speculative risks include investments in stocks and starting a new business. While these risks can also be insured under certain conditions, they are generally not the primary focus of traditional insurance products. Insurers aim to provide coverage for pure risks because they foster a clearer understanding of the potential losses and allow for more effective risk pooling.

Systematic and unsystematic risk primarily relate to investments and financial markets. Market and credit risk specifically pertain to financial institutions and asset management. Operational and legal risk relate to the challenges within an organization, such as process failures or legal liabilities. These aspects may have implications for an insurer's overall functioning but do not represent the core types of risk that insurance products are designed to address.