What differentiates pure risk from speculative risk?

The differentiation between pure risk and speculative risk lies in the outcomes associated with each type of risk. Pure risk is characterized by situations that can only result in loss or no loss, meaning there are no opportunities for financial gain. For instance, risks related to fire damage or theft are pure risks because they can lead to a definite financial loss or simply no loss at all; there are no positive outcomes or profits to be made from a pure risk scenario.

In contrast, speculative risk involves scenarios where there is potential for both gain and loss. This type of risk is commonly seen in investments, where the possibility of financial profit exists along with the risk of financial loss.

Understanding this distinction is crucial, particularly in the context of insurance and risk management. Insurers typically cover pure risks, as they are predictable and can be analyzed to estimate premiums and potential payouts. Speculative risks, by their nature, do not fit into this traditional insurance model, since the potential for gain complicates the assessment of risk and insurability. Hence, the correct answer acknowledges that pure risk yields no positive outcomes, effectively differentiating it from speculative risk.