2.1 General Insurance: Concepts

Explain the difference between pure and speculative risk.

A pure risk is a risk with a chance of loss, but no chance or expectation of gain. A speculative risk, on the other hand, is one where there is a chance of both loss or gain. Another difference between the two is that pure risk is usually not assumed for its own sake. For example, one does not purchase a car expecting to lose it through theft or an accident. On the other hand, speculative risk is usually central to the risk taken on. Gambling is a type of speculative risk, and the gambler engages in this activity expecting to finish with more money than she/he started with. A business that opens a second location also assumes the risks of expanding a business fully expecting to generate more income for the business.

Define risk.

Risk is the possibility of loss.

List the two types of risk.

pure risk speculative risk

List the five methods of handling risk.

risk avoidance risk reduction risk retention risk sharing risk transfer