Posted on October 20, 2010 by Rich Browne

In life there are different kinds of risks. Some are risks we knowingly run in order to seek certain benefits. These are called “speculative risks.” Gambling, investing, starting a business, entering into a relationship, buying a home, etc. can all turn out poorly and leave us worse off than we were going in, but they also have an upside in that they can turn out well and put us in a better position than before. Think of these risks as falling under the category “Nothing ventured, nothing gained.” We take the risks because it’s the only way we can potentially win.

But not all risks are speculative risks. Not all risks have a corresponding upside.

Bad things that can befall us, when they’re out of our control, and when they don’t come packaged with a potential upside, are called “pure risks.”

Some pure risks are personal. For example, there is a risk you will contract flu, or a risk you will be seriously injured in an automobile accident.

Other pure risks are property risks. For example, your home could be damaged by termites, or your orange grove could be severely damaged by an unseasonal frost.

Other pure risks are legal. For example, you could be sued for manufacturing unsafe products, or sued for medical malpractice.

These aren’t experiences you choose because they give you a chance to come out ahead. It’s possible your flu will be mild, or some of your trees can be saved from the frost, or you’ll successfully defend yourself in court from a malpractice lawsuit, but lessening or avoiding bad outcomes isn’t the same as benefiting. Even if you fully or partially dodge a bullet in a specific case, flu, damaging weather, and being sued don’t leave you better off.

With a pure risk, the only “good” to hope for is the absence of the bad, i.e., that the risk does not come to pass.

Pure risks are the type of risk more likely to come under insurance. For a speculative risk like an investment, you typically can’t buy insurance against the possibility you’ll lose money. You can indirectly do things sort of like that by hedging your bets, but not through insurance per se. However for many pure risks, like flood damage, theft, medical illness and disease, etc., there are forms of insurance you can obtain in advance to help in case these things happen to you.