Understanding Types of Pure Risk

Описание: Explain : Types of Pure Risk

Personal risks directly affect an individual and may involve the loss of earnings and assets or an increase in expenses. For example, unemployment may 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 as the loss of earning power and 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 insurance policies. 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 insurer now 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.