What distinguishes between speculative and pure risk?

The distinction between speculative risk and pure risk primarily revolves around the potential outcomes associated with each type of risk. Pure risk is characterized by situations that involve only the possibility of loss or no loss; there are no opportunities for financial gain. This means that in scenarios of pure risk, individuals or entities face situations such as natural disasters or accidents, where the only outcomes are a loss or a situation remaining unchanged.

On the other hand, speculative risk includes scenarios where there is a chance for both loss and gain. Typical examples of speculative risk include investments in the stock market, gambling, and starting a new business, where outcomes can vary significantly. The involvement of potential for profit (or loss) in speculative risk is what sets it apart from pure risk.

This clear differentiation is crucial for understanding how risk management and insurance principles apply to various situations faced by individuals or businesses.