Principles of Risk Management and Insurance, 13th Edition

Classification of Risk

Risk can be classified into several distinct classes. The most important include the following:

• Pure and speculative risk

• Diversifiable risk and nondiversifiable risk

• Enterprise risk

• Systemic risk

Pure Risk and Speculative Risk

Pure risk is defined as a situation in which there are only the possibilities of loss or no loss. The only possible outcomes are adverse (loss) and neutral (no loss). Examples of pure risks include premature death, job-related accidents, catastrophic medical expenses, and damage to property from fire, lightning, flood, or earthquake.

In contrast, speculative risk is defined as a situation in which either profit or loss is possible. For example, if you purchase 100 shares of common stock, you would ...