Pure risk

From CEOpedia | Management online

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

Examples of Pure risk

  • Natural Disasters: Natural disasters like floods, earthquakes, hurricanes, and tornadoes all represent pure risks. These disasters, while often unpredictable, can cause significant damage to property, people and businesses. Insurance can help to mitigate the financial losses associated with these events.
  • Accidents: Accidents, whether involving cars, planes, trains, or other transportation, are all examples of pure risk. While it is impossible to predict when and where an accident might occur, having proper insurance coverage can help to protect against the financial losses associated with these events.
  • Theft: Theft is another example of pure risk. Thieves can break into homes, businesses, and cars, and steal property or money. It is impossible to predict when and where a theft might occur, and the losses associated with such events can be significant. Insurance can help to mitigate the financial losses associated with theft.
  • Fire: Fire is another example of pure risk. Fires can start in homes, businesses, or other buildings, and can cause significant damage. Insurance can help to protect against the financial losses associated with fire.

Advantages of Pure risk

Pure risk presents certain advantages in comparison to speculative risk. The main advantages are:

  • It offers a sense of security by providing protection from potential losses. This can help individuals, businesses and governments to better plan and manage risks.
  • It encourages people to take more risks, since they know that there is a safety net in place that will protect them from the financial consequences of any losses.
  • It can be used to spread risk among a larger group of people, thereby reducing the overall financial burden on any single person or entity.
  • It allows people to invest in riskier activities or markets, knowing that they have an insurance policy in place that will protect them from any potential losses.

Limitations of Pure risk

Pure risk has several limitations that must be understood before pursuing a strategy to manage it:

  • It is not possible to control or eliminate the risk; the best option is to manage it.
  • The chances of loss are not always known, making it difficult to assess the cost of the risk.
  • It is impossible to predict when a risk may occur.
  • Risk management strategies may not be effective in all situations.
  • Pure risk is often associated with high costs, making it difficult to manage for smaller businesses.
  • The impact of the risk may be difficult to predict, making it difficult to decide the best course of action.
  • It is difficult to quantify the losses from a pure risk, making it difficult to identify the potential losses and the benefits of risk management strategies.

Other approaches related to Pure risk

Pure risk is a situation where only loss or no loss is possible, and there cannot be any gain. Other approaches related to pure risk include:

  • Speculative risk: This is a risk that involves uncertainty over the outcome and has the potential for both gain and loss. For example, investing in the stock market is a speculative risk.
  • Systematic risk: This type of risk is caused by external factors that are beyond the control of the individual or organization, such as changes in the economy or natural disasters.
  • Unsystematic risk: This type of risk is specific to an individual or organization and is not related to external factors, such as employee turnover or a product defect.

In summary, pure risk is a type of risk that involves only the potential for loss, while speculative, systematic, and unsystematic risk all involve the possibility of both gain and loss.


Pure risk — recommended articles
Net line — Risk transfer — Retention of risk — Insurance risk — Cooperative insurance — Economic risk — Total risk — Cost risk — Self insured retention

References

Author: Anna Korzeń

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