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Types and classification of risks

In the course of the activity entrepreneurs face set of different types of risk which differ among themselves in the place and time of emergence, set of the external and internal factors influencing their level and, therefore, on a method of their analysis and methods of the description.

As a rule, all types of risks are interconnected and have impacts on activity of the entrepreneur. At the same time change of one type of risk can cause change of most of the others.

Classification of risks means systematization of a set of risks on the basis of some signs and criteria allowing to unite subsets of risks in more general concepts.

The most important elements which are been the basis for classification of risks are:

  • emergence time;
  • major factors of emergence;
  • nature of accounting;
  • nature of consequences;
  • sphere of emergence and others.

On emergence time risks are spread on retrospective, current and perspective risks. The analysis of retrospective risks, their character and methods of decrease gives opportunities more precisely to predict the current and perspective risks.

On emergence factors risks are subdivided on:

  • Policy risks are the risks caused by change of the political situation influencing business activity (closure of borders, an export ban of goods, military operations in the territory of the country, etc.).
  • Economic (commercial) risks are the risks caused by adverse changes in economy of the enterprise or in national economy. The most widespread type of economic risk in which private risks are concentrated are changes of the market situation, unbalanced liquidity (impossibility in due time to fulfill payment obligations), changes of level of management, etc.

Risks are divided by the nature of accounting on:

  • The risks which are directly not connected with activity of the enterprise or its contact audience (social groups, legal and (or) natural persons which show potential and (or) real interest in activity of the concrete enterprise) belong to external risks. The level of external risks is influenced by very large number of factors - political, economic, demographic, social, geographical, etc.
  • The risks caused by activity of the enterprise and its contact audience belong to internal risks. Their level is influenced by business activity of the management of the enterprise, the choice of optimum marketing strategy, policy and tactics, etc. factors: potential production, hardware, specialization level, labor productivity level, safe engineering.

On the nature of consequences risks are subdivided on:

  • Pure risks (sometimes they are called still simple or static) are characterized by the fact that they practically always sustain in themselves losses for business activity. Natural disasters, wars, accidents, criminal acts, incapacity of the organization, etc. can be the reasons of pure risks.
  • Speculative risks (sometimes they are called still dynamic or commercial) are characterized by the fact that can bear in themselves both losses, and an additional profit for the entrepreneur in relation to the expected result. Change of the market situation, change of currency rates, change of the tax law, etc. can be the reasons of speculative risks.

Classification of risks on the sphere of emergence which basis fields of activity are is the most numerous group. According to spheres of business activity usually allocate: production, commercial, financial and insurance risk.

The production risk is connected with failure to follow by the enterprise of the plans and obligations for production, goods, services, other types of productive activity as a result of an adverse effect of the external environment and also inadequate use of the new equipment and technologies, the fixed and current assets, raw materials, working hours. Among the most important causes of a production risk it is possible to note: decrease in expected production volumes, growth of material and/or other costs, payment of the increased assignments and taxes, low discipline of deliveries, death or damage to machinery, etc.

The commercial risk is the risk arising in sales process of the goods and services made or which were purchased by the entrepreneur. Are the reasons of a commercial risk: sales reduction owing to change of an environment or other circumstances, increase in purchase price of goods, losses of goods in the course of the address, increases in distribution costs, etc.

The financial risk is connected with a possibility of failure to follow of the financial liabilities by firm. Are basic reasons of financial risk: depreciation of an investment and financial portfolio owing to change of currency rates, failures of payments.

The insurance risk is a risk of the approach provided by conditions of insurance events therefore the insurer is obliged to pay an insurance indemnity (insurance sum). The losses caused by an inefficient insurance activity as at the stage preceding insurance signing of the contract and at the subsequent stages - reinsurance, forming of insurance reserves, etc. are result of risk. Are basic reasons of an insurance risk: incorrectly certain insurance rates, hazardous methodology of the insurer.

Forming the classification connected with productive activity it is possible to mark out the following risks:

  • Organizational risks are the risks connected with errors of management of the company, her employees; the problems of an internal control system which are badly developed by rules of works that is the risks connected with the internal organization of work of the company.
  • Market risks are the risks connected with instability of an economic environment: risk of financial losses because of the change in price of goods, a downside risk of the product demand, a translation currency risk, risk of loss of liquidity and so forth.
  • Credit risks - risk that the contractor will not fulfill the obligations fully in time. These risks exist as at banks (risk not of repayment of the loan), and at the enterprises having accounts receivable and at the organizations working at security market.
  • Legal risks are risks of losses, connected with the fact that the legislation either was not considered in general, or changed in the period of the transaction; risk of discrepancy of legislations of the different countries; risk of incorrectly made documentation therefore the contractor is able not to satisfy terms of the contract and so forth.
  • Technical production risks - risk of drawing environmental damage (environmental risk); risk of emergence of accidents, fires, breakages; risk of violation of functioning of an object owing to mistakes at design and installation, a number of construction risks and so forth.

In addition to the above-stated classifications, risks can be classified by consequences:

  • The admissible risk is a risk of the decision as a result of which failure, the enterprise is threatened by loss of profit. Within this zone business activity keeps the economic feasibility, i.e. losses take place, but they do not exceed the size of an expected profit.
  • The critical risk is a risk at which the enterprise is threatened by loss of revenue; i.e. the zone of critical risk is characterized by danger of losses which obviously exceed an expected profit and, as a last resort, can lead to loss of all investments made by the enterprise in the project.
  • Catastrophic risk - risk at which there is an insolvency of the enterprise. Losses can reach the size equal to a property condition of the enterprise. Also refer any risk connected with direct danger to life of people or emergence of environmental disasters to this group.

There is a large number of types and classifications of risks depending on specifics of activity of the company. Investment risks, risks in the real estate market, risks in security market and so forth are separately classified.