Static Risk

What Does Static Risk Mean?

Static risks refer to losses caused by natural events or malicious criminal acts, rather than economic factors. These losses involve damage or loss to property or entities, resulting in financial harm to the insured party.

Typical losses include the destruction of assets or the loss of possession due to dishonesty. These losses are driven by causes other than economic changes and are generally predictable. Because of their predictability, static risks are more easily managed with insurance coverage. When included in a policy, these named risks can be covered by insurance. Static risks are often linked to certain commodities whose value is not affected by economic shifts. For instance, even in a stable economic environment, individuals with fraudulent tendencies may still engage in theft, robbery, or vandalism.

Static risks are considered pure risks, meaning:

1. There is no possibility for financial gain, and the risk was not voluntarily accepted by the insured.
2. Society does not benefit if a loss occurs.

Typical examples include damage caused by human behavior such as theft, vandalism, robbery, arson, and burglary, as well as damage caused by natural events like rain, thunder, or lightning.

While these risks are predictable, a company may require a policyholder to specify which risks they wish to cover or may offer a more comprehensive insurance option. In such cases, only the covered risks are insured and are clearly listed in the policy as either covered or excluded.

Insuranceopedia Explains Static Risk

Among the many perils that can be examined, flooding serves as a prime example of a static risk. It is the most costly natural disaster globally and can manifest in various forms, including coastal, river, and surface water flooding (also referred to as “urban” or “stormwater” flooding). Surface water flooding occurs in urban areas during heavy rainfall due to a combination of factors, such as rainwater failing to infiltrate the ground and the overflow of sewers, drainage systems, and small watercourses.

As with all static risks, society does not derive any benefit from flooding. When a flood devastates a region, it results in significant losses without any advantage to the affected community. Flood insurance provides financial protection for policyholders, helping them avoid catastrophic financial losses. By redistributing losses across all policyholders and over time, it mitigates the economic impact of flooding.

Overland flood insurance is often included in home insurance policies, requiring homeowners to pay an annual premium to cover this and other specified perils. In the event of flood damage, the insurance company reimburses the repair costs, minus the deductible—the pre-agreed amount the policyholder must pay out of pocket. While the timing and severity of floods are uncertain, flood risk is generally assessed using historical static data on properties at risk and the extent of damage anticipated during such events.