What is defined as a situation where there are only possibilities of loss or no loss?

Pure risk refers to scenarios where there is only the possibility of loss or no loss, without the chance of any potential gain. This type of risk is often associated with situations that can lead to negative outcomes, such as natural disasters, theft, accidents, or liability claims. Because there is no opportunity for profit, the focus is solely on minimizing losses and managing the uncertainties around adverse events.

In contrast, speculative risk involves opportunities for both profit and loss, which means it encompasses a broader range of outcomes. For instance, investments in stocks or new business ventures can yield profits but also carry the risk of financial loss. Fundamental risk pertains to risks that can affect large groups of people—like natural disasters or economic downturns—rather than an individual, and operational risk relates to the potential losses from internal failures or external events affecting business operations.

Understanding these distinctions helps in grasping the concept of risk management, particularly how to identify and approach different types of risk based on their inherent characteristics. Thus, pure risk is important in insurance contexts where the goal is to protect against potential losses.