Pure Risk

What Does Pure Risk Mean?

Pure risk refers to an unavoidable and uncontrollable event that results in either total loss or no loss at all. Examples include natural disasters, theft, property damage, or death. The losses caused by pure risk events can be covered by an insurance policy.

With pure risk, there is no opportunity to gain or profit from the event. Pure risk is the opposite of speculative risk, which presents the possibility of either gaining or losing, such as investing in the stock market or gambling. Insurance cannot be purchased for speculative risks, as the purpose of insurance is to restore one to their financial position before the event, not to improve it.

Pure risk is inevitable—an obvious example being the death of a person. Since death is certain, life insurance provides a death benefit to ensure financial security for survivors. In commercial insurance, business interruption is an example of pure risk. A business may need to temporarily close due to events like floods, fires, accidents, or pandemics, and business interruption insurance helps provide financial stability during such periods.

Pure risk is also known as absolute risk.

Insuranceopedia Explains Pure Risk

To protect against pure risk events that could result in property loss or financial insecurity, the following techniques are commonly used:

•     Reduction
•     Avoidance
•     Acceptance
•     Transference

With **risk reduction**, the likelihood of an event occurring is minimized through mitigation efforts. Examples include locking a car door, seeking medical care, or installing a sump pump to protect a home from flooding.

**Risk avoidance** involves eliminating the chance of loss altogether—for instance, a person who doesn’t own a car cannot have their car stolen. Risk avoidance is often more effective for speculative risks, such as stock market investments.

**Risk acceptance** means acknowledging that the event may happen and choosing not to act. For example, not purchasing insurance is a form of risk acceptance, as the individual takes on the financial burden if a loss occurs.

The most common form of risk management is **risk transference**, which involves transferring the financial risk to another party, such as an insurance company.

A common pure risk covered by auto insurance is **theft**. If a vehicle is stolen, the insurance company takes the financial hit by paying out to replace it. If the vehicle is recovered undamaged, the insurance company avoids any loss. Many insurance contracts include a 72-hour waiting period before paying for a stolen vehicle, as most vehicles are found within that time. This delay helps the insurer avoid unnecessary payouts.

All **liability risk** are considered pure risks. For example, if someone slips on a slippery walkway, they may choose to sue the property owner or not. Insurance policies often include liability coverage as part of comprehensive auto and property insurance, where the insurer represents the policyholder after a loss—another form of risk transference.

Some individuals may opt to forego insurance, believing the chances of a pure risk event are low or simply not wanting to pay the premiums. However, when these events do occur, they can lead to total loss. Although insurance premiums come at a cost, the financial impact of having to rebuild a home after a pure risk event—while still paying the mortgage—can easily lead to bankruptcy.