Pure risk

From CEOpedia | Management online
Pure risk
See also

Pure risk is a situation where only loss or no loss is possible, and there cannot be any gain. It is a category of hazard known also as absolute risk. An example of pure risk is identity theft or disability that ends working career. There is nothing to win, one can only loose. Some types of insurance products help to mitigate that risk. The concept of risk is often found in life, usually unpredictable. Effects occur at any time or range.

  • The two most basic types of risk are pure risk and dynamic risk:

Pure risk is a potential loss or damage, without the possibility of an advantage. For example, in the pure risk category, we include the employer's responsibility for protecting employees and clients. It does not bring benefits but only an additional cost. Pure risk includes, among others, natural disasters, acts of terrorism, crimes, accidents or hacker attacks. In turn, dynamic risk has potential for both benefits and losses. The risk occurs as a result of the aware decision made.

Types of Pure Risk

Pure risk can be categorized into three groups:

  • Personal Risks are personal threats such as death, illness, disability, loss of assets or unemployment. They can cause additional costs as well as loss of income.
  • Property Risks it may refer to a direct loss when the entity's property is lost, stolen or destroyed. Loss of value by one event such as fire, hurricane, hail may generate further losses as indirect losses.
  • Liability Risks arises in the case when someone's action causes material loss, financial loss or injury to another person. In such situations, the person committing the offense is liable to the injured person.

Speculative Risk versus Pure Risk

It is associated with a risk, when loss, gain or no change can happen. For example, in the situation of undertaking a new venture we are dealing with speculative risk, because we do not know whether the undertaking will be profitable. The distinction between pure and speculative risk is important because most private insurers typically insure only pure risks or speculative risk is not normally insurable.

Static Risk versus Dynamic Risk

It is a risk in which the quantity is measurable and predictable. It is a form of pure risk in the absence of changes. An example of this risk may be a fire. It applies to changes in the economy and thus to the whole community, it is a broad risk. Examples of dynamic risk are changes in commodity prices, interest rates, foreign exchange rates, the value of money and changes in the general levels of income and changes in general economic. It is a risk that is difficult to predict.

Fundamental Risk versus Particular Risk

Risks for a large group of people or companies due to economic, political or natural causes. Include war, massive flood or inflation. Fundamental risks may or may not be insurable. Particular risk that applies to individual units. The losses occur in isolated events. An example may be burglary. This is usually insured risk.

Risk Reduction

Pure risk will always exist, therefore it cannot be eliminated. In turn, dynamic risk cannot be avoided without incurring indirect losses. In the case of dynamic risk, it can be avoided by changing the decision. The best solution is to set up procedures and use equipment to minimize or eliminate the risk. The use of insurance allows you to reduce or at least compensate for the potential risk.

Alternatives for Risk:

  • Risk elimination
  • Risk reduction
  • Risk spreading
  • Risk transfer
  • Risk acceptance


Author: Anna Korzeń