What Is Pure Risk?
Pure risk is a category of risk that cannot be controlled and has two outcomes: complete loss or no loss at all. There are no opportunities for gain or profit when pure risk is involved.
Pure risk is generally prevalent in situations such as natural disasters, fires, or death. These situations cannot be predicted and are beyond anyone's control. Pure risk is also referred to as absolute risk.
Key Takeaways
- Pure risk cannot be controlled and has two outcomes: complete loss or no loss at all.
- There are no opportunities for gain or profit when pure risk is involved.
- Pure risks can be divided into three different categories: personal, property, and liability.
- Many cases of pure risk are insurable.
Understanding Pure Risk
There are no measurable benefits when it comes to pure risk. Instead, there are two possibilities. On the one hand, there is a chance that nothing will happen or no loss at all. On the other, there may be the likelihood of total loss.
Pure risks can be divided into three different categories: personal, property, and liability. There are four ways to mitigate pure risk: reduction, avoidance, acceptance, and transference.The most common method of dealing with pure risk is to transfer it to an insurance company by purchasing an insurance policy.
Many instances of pure risk are insurable. For example, an insurance company insures a policyholder's automobile against theft. If the car is stolen, the insurance company has to bear a loss. However, if it isn't stolen, the company doesn't make any gain. Pure risk stands in direct contrast to speculative risk, which investors make a conscious choice to participate in and can result in a loss or gain.
Pure risks can be insured because insurers are able to predict what their losses may be.
Types of Pure Risk
Personal risks directly affect an individual and may involve the loss of earnings and assetsor an increase in expenses. For example, unemploymentmay create financial burdens from the loss of income and employment benefits. Identity theft may result in damaged credit, and poor health may result in substantial medical bills, as well asthe loss of earning powerand the depletion of savings.
Property risks involve property damaged due to uncontrollable forces such as fire, lightning, hurricanes, tornados, or hail.
Liability risks may involve litigation due to real or perceived injustice. For example, a person injured after slipping on someone else's icy driveway may sue for medical expenses, lost income, and other associated damages.
Insuring Against Pure Risk
Unlike most speculative risks, pure risks are typically insurable through commercial, personal, or liability insurancepolicies. Individuals transfer part of a pure risk to an insurer. For example, homeowners purchase home insurance to protect against perils that cause damage or loss. The insurernow shares the potential risk with the homeowner.
Pure risks are insurable partly because the law of large numbers applies more readily than to speculative risks. Insurers are more capable of predicting loss figures in advance and will not extend themselves into a market if they see it as unprofitable.
Speculative Risk
Unlike pure risk, speculative risk has opportunities for loss or gain and requires the consideration of all potential risks before choosing an action. For example, investors purchase securities believing they will increase in value.
But the opportunity for loss is always present. Businesses venture into new markets, purchase new equipment, and diversify existing product lines because they recognize the potential gain surpasses the potential loss.
FAQs
Pure risk is a category of risk that cannot be controlled and has two outcomes: complete loss or no loss at all. There are no opportunities for gain or profit when pure risk is involved. Pure risk is generally prevalent in situations such as natural disasters, fires, or death.
What is the definition of a pure risk? ›
Pure risk refers to risks that are beyond human control and result in a loss or no loss with no possibility of financial gain.
What is Pure risk Quizlet? ›
Terms in this set (26) Pure risk. is a chance of loss with no chance for gain. Speculative risk. may result in either gain or loss.
What are the 2 types of risk? ›
Types of Risk
Broadly speaking, there are two main categories of risk: systematic and unsystematic.
What is pure risk brainly? ›
Final answer:
Pure risk refers to a type of risk where there is only a possibility of loss. Examples include natural disasters, accidents, and theft.
What is an example of a pure and speculative risk? ›
Investing in the stock market is an example of a speculative risk. One can only speculate on whether the investment will produce a profit or a loss. Insuring an automobile is an example of pure risk. If the insured auto is involved in an auto accident, there is most definitely going to be some sort of damage (loss).
What is the difference between a business risk and pure risk? ›
Business risk is the risk event of gain or loss that results from business activities. Pure risk is only a risk of loss, such as fire or theft.
Which is not a pure risk? ›
Since there is the chance of a large gain despite the high level of risk, speculative risk is not a pure risk, which entails the possibility of only a loss and no potential for gains.
Which of the following is not an example of a pure risk? ›
The correct answer is b.
The risk of your savings plan losing money.
What is the opposite of pure risk? ›
Speculative risk is the opposite of pure risk, which is a risk that is inevitable and can result in either loss or no loss, but never gain.
Risk is made up of two parts: the probability of something going wrong, and the negative consequences if it does.
What are the two types of risk taking? ›
But risk-taking can also be positive and lead to new experiences, personal growth, and success. There are different types of risk-takers: those who take physical risks, those who take financial risks, and those who take social risks.
What are the two kinds of risk quizlet? ›
A company faces two kinds of risk. A firm-specific risk is that a competitor might enter its market and take some of its customers. A market risk is that the economy might enter a recession, reducing sales.
What is pure risk your answer? ›
Pure risk is a category of risk that cannot be controlled and has two outcomes: complete loss or no loss at all. There are no opportunities for gain or profit when pure risk is involved. Pure risk is generally prevalent in situations such as natural disasters, fires, or death.
What is the other term for pure risk? ›
Unlike other types of risks, pure risks have only one outcome: loss. There is no chance or expectation of profit. Pure risk, often termed absolute risk, is a type of risk that cannot be insured.
What is pure risk characterized by quizlet? ›
Rationale: In order to be characterized as pure risk, the loss must be due to chance, definite, measurable, and predictable, but not catastrophic.
Which risk is not a pure risk? ›
Since there is the chance of a large gain despite the high level of risk, speculative risk is not a pure risk, which entails the possibility of only a loss and no potential for gains.
What is the difference between pure risk and market risk? ›
Market risk means uncertainty connected to a particular investment decision. When a small business is started there is the uncertainty surrounding whether it will be successful or not. This is an example of market risk. Pure risk means uncertainty connected to a situation where only loss or no loss can occur.
What is fundamental and pure risk? ›
Pure risk can have no potential for gain. Fundamental and Particular risks may both be insurable but differ from each other in one specific way. Fundamental risk is related to events that usually arise from nature and cannot be controlled by any individual or group.
What is a diversifiable risk? ›
Specific risk, or diversifiable risk, is the risk of losing an investment due to company or industry-specific hazard. Unlike systematic risk, an investor can only mitigate against unsystematic risk through diversification. An investor uses diversification to manage risk by investing in a variety of assets.
