In insurance terms, what is the difference between pure risk and speculative risk?

In the context of insurance, the distinction between pure risk and speculative risk is fundamental. Pure risk refers to situations that involve only the possibility of loss or no loss, with no chance for financial gain. This type of risk is insurable because it can result in claims that insurance policies are designed to cover, such as damage to property, illness, or death.

On the other hand, speculative risk includes scenarios where there is potential for both gain and loss. These risks are inherently uncertain and can lead to profit or loss, such as investing in the stock market or starting a new business. Because of this dual possibility, speculative risks are not insurable.

Therefore, indicating that speculative risk can result in a gain or loss clarifies the nature of such risks and differentiates them from pure risks. This understanding is pivotal for effective risk management and insurance underwriting, as it guides decisions on what types of risks can and cannot be covered by insurance policies.