The world is a dangerous place; it’s full of risk. So do you know which risks are insurable, and which risks aren’t? Do you know why those risks are and aren’t insurable? What are pure risks? What are speculative risks? This article will answer these questions by taking a conceptual view on Pure Risk and Speculative Risks.
Have you ever heard of someone trying to submit a claim to their insurer for losing money on a bet or on the stock market? What about lost profits from a Black Market deal gone sour? I imagine you haven’t. I also imagine that the insurance company would have to hide their laughter while they tried to handle a claim for one of those scenarios.
Losing money because of gambling or investing in the stock market are Speculative Risks—scenarios where you could receive a financial benefit or detriment. While all risks involve a chance of loss, Speculative Risks also allow for a chance of gain. Insurance companies would end up hating casinos if Speculative Risks were insurable.
So if a risk only has the chance of financial detriment, it is considered a Pure Risk and most Pure Risks can be insured. For example, the risk of your home being damaged by fire includes only two options: the fire happens, causing damage; the fire doesn’t happen, nothing changes. Auto accidents, property damage from wind and hail, lost assets from theft, and many more Pure Risks can be insured.
What Pure Risks Cannot Be Insured?
This is where the Black Market deal comes in. Insuring criminal activities simply isn’t beneficial for society, so even though there are some (technically) Pure Risks involved, the illegal nature automatically excludes it from insurance coverage.
Another category of Pure Risks that can’t be insured are catastrophic losses. Large, widespread losses are very hard to predict and profitably insure. Things such as War and Nuclear Explosions are excluded for these reasons. However, there are exceptions, such as Flood and Terrorism coverage. Coverage is only available because there are federal programs offering coverage for them. Note that these government programs are historically unprofitable, and that the coverage provided is usually pretty limited.