Which statement best defines pure risk?

Pure risk is characterized by situations that offer only the possibility of loss, without any opportunity for financial gain. This concept is central to understanding risk in the context of insurance and financial planning.

When identifying pure risk, it is essential to recognize that it solely involves uncertain outcomes where the negative results, such as injury, destruction, or theft, could lead to financial losses. Unlike speculative risks, which can result in both gains and losses, pure risks do not have the potential for profit; they strictly pertain to loss scenarios where the entity engaged cannot benefit financially from the risk.

This definition is critical for individuals and businesses involved in risk management, as it helps in determining the appropriate measures needed to minimize or eliminate these risks, usually through insurance coverage, which is designed specifically to protect against such potential losses. Understanding this distinction enhances comprehension of risk types and informs effective decision-making when insuring against risks.