What is Pure Risk?
Pure Risk is defined as an inescapable and uncontrollable occurrence that results in absolute damage or no damage. Natural catastrophes, thievery, property destruction, or mortality are all examples. An insurance plan can compensate for harm or loss caused by occurrences posing these risks.
Understanding Pure RIsk
It involves only a possibility of loss but no possibility of profit. According to Brigham and Others, “Pure risks are that offer only the prospect of a loss. Examples include the risk that a plant will be destroyed by fire or that a product liability suit will result in a large judgment against the firm.”
There is no way to benefit or earn from an occurrence-based only on risk. There is no such thing as pure risk gambling; it will happen sooner or later. Absolute risk is another term for it. This risk may be mitigated in four main ways: minimization, avoiding, acceptance, and transferring.
Types of Pure Risks
Personal Dangers
These are all the hazards that directly impact a person's capacity to make a living. Personal risks can be categorized as follows:
- Early Death: The death of a breadwinner who has unmet or underfunded financial commitments.
- Aged: It relates to the danger of not having enough money just at the average retirement age or even the period where the person may no longer be able to make money.
- Illness or Impairment: A human's risk of bad health or inability to earn a living. For example, a driver's arms might be damaged in an accident.
- Joblessness: The possibility of being laid off due to socioeconomic issues, leading to financial instability.
Property Risks
These are all the dangers of the asset being harmed or destroyed by the people in control of it. The immovables, such as real estate property, are damaged by flood, earthquakes, or flames, while the movables, such as equipment and individual goods, are burned to the ground or stolen. In that case, direct or indirect/consequential losses are possible.
Risks of Liability
These are the hazards associated with intentional or accidental bodily harm or property destruction resulting from negligence or lack of care. Accountability risks are often derived from legislation. Threats may also develop as a consequence of others, supplementary to the groups mentioned above. For example, monetary losses resulting from contractual non-performance or level of performance in design or building contracts are among these risks.
Practical Example
An insurance provider may protect a policyholder's building against fire. If it catches fire or burns, the insurance provider must pay a loss. However, if it is not taken, the corporation makes no profit, and that’s pure risk.
In Sentences
- This document defines pure risk as a type of possibility of loss in financial assets.