Static and Dynamic Risk

28/07/2020 0 By indiafreenotes

A static risk refers to damage or loss to a property or entity that is not caused by a stable economy but by destructive human behavior or an unexpected natural event. This risk can be covered by insurance.

Static risks are often associated with a commodity the value of which will not be affected by an economic change. It even further presumes that the financial state is, more or less, stable.

Static risks include damage caused by human behavior, such as theft, vandalism, robbery, arson, and burglary. It also includes damage caused by natural conditions like rain, thunder, or lightning.

Insurance covers these kinds of risk. A policy might require a policyholder to specify which risks they want to have covered or they might simply opt for a more comprehensive insurance coverage.

Static Risk

Static risks are risks that involve losses brought about by irregular action of nature or by dishonest misdeeds and mistakes of man.  Static losses are present in an economy that is not changing (static economy) and as such, static risks are associated with losses that would occur in an unchanging economy.  For example, if all economic variables remain constant, some people with fraudulent tendencies would still go out steal, embezzle funds and abuse their positions.  So, some people would still suffer financial losses.  These losses are brought about by causes other than changes in the economy.  Such as perils of nature, and the dishonesty of other people.

Static losses involve destruction of assets or change in their possession because of dishonesty.  Static losses seem to appear periodically and because of these they are generally predictable.  Because of their relative predictability, static risks are more easily taken care of, by insurance cover then are dynamic risks.  Example of static risk include theft, arson assassination and bad weather.  Static risks are pure risks.

Dynamic Risk

Dynamic risk is risks brought about by changes in the economy.  Changes in price level, income, tastes of consumers, technology etc (which is examples of dynamic risk) can bring about financial losses to members of the economy.  Generally dynamic risks are the result of adjustments to misallocation of resources.  In the long run, dynamic risks are beneficial to the society.  For example, technological change, which brings about a more efficient way of mass producing a higher quality of article at a cheaper price to consumers than was previously the case, has obviously benefited the society.

Dynamic risk normally affects many individuals, but because they do not occur regularly, they are more difficult to predict than static risk.

Difference between dynamic risk and static risk

Static Risk

Dynamic Risk

Most static risks are pure risks They are mainly speculative risks.
They are easily predictable They are not easily predictable
The society derives no benefit or gain   from static risk.  Static risks are always harmful. The society derives some benefits from dynamic risk.
Static risks are present in an unchanging economy. Dynamic risks are only present in a changing economy
Static risks affect only individuals or very few individuals. Dynamic risk affect large number of  Individuals.