Illinois Casualty Insurance State Practice Exam

What is the main difference between pure risk and speculative risk?

1. Pure risk has uncertain outcomes, while speculative risk does not

2. Pure risk only entails losses, while speculative risk can involve gains or losses

3. Pure risk is insurable, while speculative risk is not

4. Pure risk is based on negligence, while speculative risk is not

The correct answer is: Pure risk only entails losses, while speculative risk can involve gains or losses

The primary distinction between pure risk and speculative risk lies in the nature of the outcomes associated with each. Pure risk is characterized exclusively by the possibility of loss or no loss; it does not involve any potential for financial gain. This means that in instances of pure risk, the options available are either a harmful event occurs (leading to a financial loss), or it does not occur (resulting in no loss). Consequently, pure risks are often insurable, as insurance is designed to protect against those potential losses. In contrast, speculative risk encompasses scenarios where one can either gain or lose, such as in investments or business ventures. For instance, participating in the stock market presents a speculative risk; an investor could experience a profit (a gain) or a loss depending on market conditions. As a result, speculative risks are generally not insurable because the potential for gain is intrinsic to their nature. This fundamental difference clarifies that option B accurately captures the essence of these two types of risk, emphasizing that while pure risk entails potential losses or no loss, speculative risk inherently involves the possibility of both gains and losses.