What Is Pure Risk? Potential Outcomes, and Types

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What Is Pure Risk? Potential Outcomes, and Types

ByPure risk is a type of risk that is uncontrollable and can result in either a total loss or no loss at all. When pure risk is involved, there are no options for gain or profit.

Natural disasters, fires, and fatalities are examples of situations where pure risk is frequently present. These circumstances are unpredictable and out of anyone’s control. Absolute risk is another name for pure risk.

KEY LESSONS

  • Pure risk is uncontrollable and can result in either a total loss or no loss at all.
  • When pure risk is involved, there are no options for gain or profit.
  • Three groups of pure hazards can be distinguished: personal, property, and liability.
  • Pure risk situations are insured in several cases.

Recognizing Pure Risk

With regard to pure risk, there are no quantifiable rewards. There are two alternatives instead. One possibility is that nothing will happen or that there will be no loss at all. On the other hand, there’s always the chance of total loss.

Three groups of pure risks can be classified: personal, property, and liability. Pure risk can be reduced, avoided, accepted, or transferred in one of four ways. The most popular way to manage pure risk is to assign it to an insurance provider by acquiring an insurance policy.

Pure risk is frequently insurable. For instance, an insurance provider covers the car of a policyholder against theft. The insurance provider will incur a loss if the car is stolen. However, the business loses money if it isn’t stolen. Speculative risk, which investors choose to engage in and which may result in a loss or gain, contrasts sharply with pure risk.

Pure Risks Types

The loss of assets and income as well as an increase in expenses are examples of personal risks that directly impact an individual. For instance, the loss of benefits from job and income due to unemployment may result in financial hardship. Damage to credit from identity theft, high medical costs, loss of income potential, and depletion of savings are all possible outcomes of poor health.

Property risks include harm to property brought on by unforeseen events like fire, lightning, hurricanes, tornadoes, or hail.

Liability risks can include court cases brought about by actual or perceived injustice. For instance, someone hurt after slipping on another person’s icy driveway may file a lawsuit for medical costs, lost wages, and other related damages.

Protection Against Pure Risk

Pure risks, in contrast to the majority of speculative risks, are frequently covered by commercial, liability, or personal insurance policies. People assign an insurer a portion of a pure risk. For instance, homeowners buy home insurance to guard against dangers that result in loss or damage. The possible risk is now split between the homeowner and the insurer.

Because the rule of large numbers applies more readily to pure risks than to speculative ones, pure risks are insurable. Insurance companies are better able to anticipate loss amounts and won’t enter a market that they believe will be unprofitable.

Potential Risk

Speculative risk, as contrast to pure risk, has the potential to result in loss or gain and necessitates careful consideration of all risks before taking any action. For instance, investors buy securities with the expectation that their value will rise.

But there is always a chance for failure. Businesses diversify their existing product lines, buy new equipment, and enter new markets because they understand that the possible gain outweighs the potential loss.

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