What Does Static Risk Mean?
Static risks are risks that involve losses brought about by acts of nature or by malicious and criminal acts by another person. These losses refer to damages or loss to property or entity that is not caused by the economy. In these cases, there is a financial loss to the insured party.
Typical losses involve the destruction of assets or loss of possession as a result of dishonesty. These losses are brought about by causes other than changes in the economy and are generally considered predictable. Static risks are more easily taken care of by insurance coverage because of their relative predictability. This allows the named risks to be covered by insurance when included as in a policy. Static risks are often associated with losses of certain commodities of which are not affected by an economic change. For example, if the economic environment remains constant, people with fraudulent tendencies may still steal, rob and vandalize others' property.
This type of risk is considered pure risk which means a number of things:
First, there is no chance for a financial gain and the risk was not voluntarily accepted by the insured.
Second, the general society will not benefit if a loss occurs. Typical risks include damage caused by human behaviour, such as theft, vandalism, robbery, arson, and burglary. It also includes damage caused by natural conditions like rain, thunder, or lightning.
Although these risks are considered predictable, a company might require a policyholder to specify which risks they want to have covered or they might simply opt for more comprehensive insurance coverage. In these cases only covered risks are insured and are listed in all policies as covered or exclusions.
Insuranceopedia Explains Static Risk
While there are numerous perils that can be discussed, a flood is a prime example of a static risk. Flooding is the most expensive natural disaster worldwide. Flooding can occur in various forms, such as coastal, river and surface water flooding (sometimes known as ‘urban’ or ‘stormwater’ flooding). Surface water flooding occurs when an urban area floods during heavy rainfall as a result of a combination of factors, including rainwater not infiltrating the ground and the overflowing of sewers, drainage and small watercourses.
As we mentioned a static risk is one that society would not benefit from. When a flood destroys a certain region, society in that region would not benefit from such an event in any way. Flood insurance helps to ensure that insurance policy-holders do not incur disastrous financial losses during floods. It redistributes losses across all policy-holders and also over time.
Often, overland flood insurance is listed in a home insurance policy and in return, the homeowner will pay an annual premium for this and other covered perils. The cost to repair flood damage will then be reimbursed by the insurance company, (less the deductible: the pre-agreed threshold amount the policyholder pays out of pocket.) While exactly when these floods will occur or the extent of the damage is somewhat unknown, typically flood risk is calculated using historic static data on properties at risk and the damage that will occur during a flood.