What is the primary distinction between pure risk and speculative risk?

The primary distinction between pure risk and speculative risk is that pure risk is generally insurable, whereas speculative risk is not. Pure risk encompasses situations where there is a potential for loss, but no opportunity for gain, such as the risk of fire, theft, or natural disasters. These types of risks are often covered by insurance policies because they allow insurers to pool risk and help individuals or businesses recover from unforeseen negative events.

In contrast, speculative risk involves scenarios where there is both a possibility of loss and a chance of gain, such as investing in stocks or starting a new business. Because speculative risks involve elements of investment and potential profitability, they are not typically insurable. Insurers generally do not cover these risks as they are tied to individuals' decisions and market variables that can lead to gains or losses.

This distinction is essential for understanding risk management and insurance principles, as it helps individuals differentiate between various risks they may encounter in personal finance and investments.