What is an example of a fundamental risk?

A fundamental risk pertains to risks that can have a widespread impact on a large population or economy, affecting many individuals or entities simultaneously rather than being confined to a single person or organization. Economic recessions are classic examples of fundamental risks because they affect the entire economy, leading to significant consequences such as job losses, decreased consumer spending, and overall financial strain on businesses and households.

The nature of a recession means that it often results from various external factors, such as changes in government policy, global market trends, or natural disasters, which can have a ripple effect across all sectors. It contrasts with risks that are more individual or localized, such as personal injury, machinery breakdown, or winning the lottery, which usually involve specific circumstances affecting only a smaller group of people. Understanding fundamental risks is crucial in the insurance industry, as they require different management strategies and policy designs to mitigate their impact on society as a whole.