Definition
Pure Risk
Pure risk is a situation with only the possibility of loss or no loss, with no chance of gain, and it is the only kind of risk that is insurable.
Examples include the risk of fire, death, illness or accident, where the outcome is either a loss or the status quo, never a profit. Because pure risks are measurable and involve no upside, they fit the insurance model of pooling and compensation.
Pure risk contrasts with speculative risk, like stock trading or starting a business, where loss, gain or break-even are all possible. Speculative risks are not insurable because they include the chance of profit and the insured could be tempted to influence the outcome.
Related terms
- PerilA peril is the actual cause of a loss, such as fire, flood, theft, accident or illness, against which insurance provides protection.
- Insurable InterestInsurable interest is the legal requirement that the policyholder stands to suffer a genuine financial loss from the insured event, making the contract valid.
- Speculative RiskSpeculative risk is a situation that carries the possibility of loss, gain or no change, and is generally not insurable.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.