Which type of risk involves the possibility of either loss or gain and is not insurable?

• A. Speculative Risk
• B. Peril
• C. Insurance
• D. Pure Risk

Answer: (A)

Speculative risk is the type that involves the possibility of either a loss or a gain. Insurance is built to cover pure risks—those with only potential for loss (or no loss) and no possibility of a gain—because pure risks can be predicted, measured, and pooled across many policyholders. When the outcome can include profit, as with speculative risk (such as investing in stocks, starting a business, or gambling), insurers cannot price or guarantee outcomes in a fair, predictable way, and there’s little incentive to insure against the possibility of gain. That’s why this type of risk is not insurable. Peril is merely the specific cause of a loss, not a risk category. Insurance is the contract that transfers risk, not itself a type of risk. Pure risk, by contrast, is the kind insurers typically cover, since it involves only loss or no loss.