What are the two types of risk in insurance?

The correct answer identifies the two main categories of risk in insurance as pure and speculative.

Pure risk refers to situations where there can only be a loss or no loss, but with no chance for financial gain. Common examples include risks related to natural disasters, theft, or liability. Insurance is designed to cover these types of risks since they can be statistically evaluated and pooled together, allowing insurers to assess and manage them effectively.

Speculative risk, on the other hand, involves scenarios where there is a possibility of loss or gain. This type of risk is often associated with investments where the outcome is uncertain and can vary significantly, like stock market investments or starting a business. Because speculative risks can lead to both positive and negative outcomes, they typically are not insurable through standard property and casualty insurance policies.

Understanding the distinction between these types of risks is critical in the insurance field, as it defines what can be insured versus what cannot or should not be insured. While options like personal and property or insurable and uninsurable reference different aspects of risk, they do not accurately reflect the foundational categories recognized in insurance theory.