Question

What is pure risk?

Answer 1

Pure risk is a type of risk that involves only the possibility of loss or no change — there is no opportunity for gain. It’s the kind of risk most commonly addressed by insurance.

Key points
- Definition: an exposure where outcomes are loss or no loss (no chance of profit).
- Examples: fire, flood, theft, illness, death, liability claims.
- Contrast with speculative risk: speculative risk includes possible gain, loss, or no change (e.g., investing, gambling). Speculative risks are generally not insurable.
- Typical categories: personal risk (illness, death, unemployment), property risk (damage or theft), liability risk (legal claims).

Characteristics that make pure risks insurable
- Losses are accidental and unintentional.
- Losses are definite and measurable.
- A large number of similar exposures exist (law of large numbers).
- Losses are not catastrophic in a way that would ruin the insurer (or are reinsured).
- Premiums are economically feasible for the insured.

Common ways to handle pure risk
- Avoidance (eliminate the activity causing risk)
- Loss prevention (reduce probability of loss)
- Loss reduction (minimize severity of loss)
- Retention (self-insure or bear the loss)
- Transfer (buy insurance or transfer risk contractually)

If you want, I can give examples for a specific context (personal insurance, business risk management, etc.).