Reviewed by Stefan Tirschler
Updated October 26, 2023
pure·risk | ˈpyu̇r ˈrisk
Definition: A form of risk that carries no potential for gain or profit.
If a situation can only end in a loss, it’s a pure risk.
In the most basic sense, risk is the possibility that something might happen. Pure risk is a type of risk in which there are only two possibilities: nothing happens, or something negative happens—there is no possible upside. This contrasts with speculative risk, which has the same two possibilities but also the chance of a positive outcome.
Pure risk is also known as absolute risk.
As an example of each type of risk, imagine a friend wants to open a hot dog cart. A pure risk would be loaning your friend $1,000 interest-free to buy the cart. The only possibilities are:
On the other hand, a speculative risk would be investing $1,000 in the hot dog cart in exchange for 10% of the profits. That way, the possibilities are:
Pure risk (and risk in general) is an important concept in insurance—you’ll see why in the following section.
Risk is part of life. Sometimes it’s avoidable, but most of the time, we need to learn how to live with it. Fortunately, there are practical methods for approaching risk. There are essentially four ways to deal with (or mitigate) risk:
Risk avoidance means simply choosing not to take a risk. In the hot dog cart example, it would mean neither offering a loan nor investing—rather walking away from the hot dog cart proposal entirely.
Risk reduction means taking a risk, but also taking steps to reduce the impact or frequency of any potential losses. With the hot dog cart, it might mean choosing to invest in one whose owner has prior experience running food trucks, instead of one whose owner has never run a business before.
Risk acceptance is as simple as it gets: taking the risk as-is. Both the hot dog cart examples from the previous section are simple risk acceptance: either loaning the money or making the investment with no additional measures to protect the lender or investor from potential loss. Some risks are just worth it.
Risk transfer is the process of offloading your risk onto another party. The most common form this takes is insurance. In exchange for a premium, an insurance company agrees to cover certain risks as laid out in the insurance policy.
Only pure risks are insurable. But as long as the insurer can calculate the risk and an appropriate premium to charge in exchange for it, pretty much any pure risk is theoretically insurable. Of course, many risks are difficult to quantify, which is why insurance policies usually exclude highly unpredictable events like war or terrorism.
Using home insurance as an example: a home insurance policy transfers the risk of the house burning down (among many other things) from the homeowner to the insurance company. The homeowner pays their premiums, and in exchange, the insurance company agrees to cover the cost of repairing the home if it’s damaged by a peril covered by the policy (like fire, hail, or wind).
Most insurance policies include deductibles—amounts that the policyholder pays when they make a claim, before their policy covers the rest of a loss. A deductible is the policyholder’s agreement to retain a small portion of the risk (and pay lower premiums in exchange).
It’s possible to buy insurance for all sorts of risks: loss or damage to your stuff, liability-related damages, vehicle accidents, business interruptions… Most insurance policies cover multiple forms of risk.
Looking for another insurance definition? Look it up in The Insurance Glossary, home to dozens of easy-to-follow definitions for the most common insurance terms. Or, get an online quote in under 5 minutes and find out how affordable personalized home insurance can be.
About the expert: Stefan Tirschler
Stefan is responsible for underwriting leadership, market expansion, and product research and development for Square One's operations. Stefan has earned his Fellow Chartered Insurance Professional designation, and maintains a level 2 general insurance license in British Columbia, Alberta, Saskatchewan, Manitoba and Ontario. Stefan is also an Education Committee member and CIP/GIE instructor for the Insurance Institute of Canada.
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