What are the two types of risk commonly recognized in insurance?

The recognition of pure risk and speculative risk as the two main types of risk in insurance is rooted in the fundamental concepts of risk management. Pure risk refers to situations that present a chance of loss or no loss; there is no possibility of a gain. For example, perils like fire, theft, or natural disasters fall under pure risk because they can only result in loss or neutral outcomes. In contrast, speculative risk involves scenarios where there is a chance for both loss and gain, such as investing in the stock market or starting a new business. These risks are not insurable in the same way pure risks are since they involve the possibility of profit.

Understanding these two categories helps insurers assess risk more accurately and develop appropriate coverage options. Pure risk can be transferred to insurance policies, while speculative risks typically remain the responsibility of the individual or business. Recognizing the distinction between these types of risks is essential for effective risk management and underwriting practices in the insurance industry.