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What is Pure Risk?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 01 December 2016
  • Copyright Protected:
    2003-2016
    Conjecture Corporation
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Pure risk is a term that is applied to any situation where there is no potential for any benefit to be realized if a specific outcome should result. Typically, events that are considered to carry this level of risk are out of the control of the individual who is assuming the risk, making it impossible to actually make a conscious decision to take on the risk. Insurance is often utilized as a means of minimizing losses from risk of this type, a factor that can offset the fact that no actual gains can be realized from the situation.

Since there is no chance for a beneficial result from pure risk, it is considered to be the opposite of speculative risk. Speculative risk does require a conscious decision to consider all risk factors before choosing a course of action. Typically with this type of risk, there is at least the potential of earning some sort of return or gains over time. An example of speculative risk would be the purchase of securities, where there is some indication that the shares will increase in value if certain events occur in the marketplace. Speculative risk does also carry the possibility of incurring a loss, but that potential is offset by the possibility of also earning a return.

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With pure risk, there is no real hope of earning a return. For example, if a home is destroyed in some sort of natural disaster, the homeowner incurs a loss that cannot be offset, even if the property where the home once existed is eventually sold. While the homeowner may be able to minimize the loss by selling the property, the proceeds from the sale do not replace the asset. In order to do so, the individual will have to make arrangements to purchase a new home at a different location, effectively creating a new debt obligation that is only partially offset by the sale of the previous property.

There are other forms of pure risk that result in some sort of loss that cannot be completely reversed. The premature death of a spouse creates a loss of earning income for a household that can never be replaced completely. Identity theft creates losses that are so all-encompassing that even once the situation is overcome, the cumulative loss is never completely offset. Even situations such as a permanent disability that makes it impossible to continue with a particular career result in a loss that cannot be offset by entry into a different line of work.

In many situations, insurance coverage can help to lower the degree of loss incurred by pure risk, by transferring part of that risk to the insurer. Homeowners coverage can aid in offsetting the loss of a home due to a natural disaster, providing the insured party with resources to begin rebuilding. Disability insurance can provide at least some income that can be used to offset the loss of income from work that the insured party can no longer perform. Disbursements from a life insurance policy helps a surviving spouse to replace a portion of the income once generated by the deceased partner. For this reason, securing insurance that covers situations that are outside the control of the insured party is extremely important.

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