PPT Chapter 3 Term Structure Of Interest Rates Empirical Properties And Classical Theories

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Table of Contents

1. What is pure risk?
2. What are the 4 examples of pure risk?
3. How to identify pure risk?
4. Why is pure risk important?
5. How to manage pure risk?

What is pure risk?

Pure risk is a type of risk that involves the possibility of loss but no possibility of gain. It is also known as absolute risk or insurable risk. Pure risk is different from speculative risk, which involves the possibility of gain as well as loss.

For example, the risk of a fire destroying your home is a pure risk. If a fire occurs, you will experience a loss, but if it does not occur, you will not gain anything. On the other hand, the risk of investing in the stock market is a speculative risk. You have the possibility of gaining money, but you also have the possibility of losing money.

What are the 4 examples of pure risk?

There are several examples of pure risk that individuals and organizations face in their daily lives. Some of the most common examples of pure risk are:

Natural disasters

Natural disasters such as earthquakes, hurricanes, floods, and tornadoes are examples of pure risk. There is no way to prevent these events from occurring, and if they do occur, they can result in significant losses.

Illness or injury

Illness or injury is another example of pure risk. You cannot predict when you will become ill or injured, but if it does happen, it can result in financial losses due to medical bills and loss of income.

Death

Death is a pure risk that everyone faces. While we cannot predict when we will die, we can prepare for it by purchasing life insurance to provide financial support for our loved ones after we are gone.

Liability

Liability is a pure risk that businesses and individuals face. Liability refers to the legal responsibility for any harm or damage caused to another person or their property. If a business or individual is found liable for damages, they may be required to pay for medical bills, property damage, and other expenses.

How to identify pure risk?

Identifying pure risk is an important step in managing it. Here are some ways to identify pure risk:

Review historical data

Reviewing historical data can help identify patterns of pure risk. For example, if a business is located in an area where hurricanes occur frequently, this is a pure risk that should be addressed in the company's risk management plan.

Conduct risk assessments

Conducting risk assessments can help identify potential pure risks. Risk assessments involve identifying potential hazards and evaluating the likelihood and severity of their impact.

Consult with experts

Consulting with experts such as insurance agents, lawyers, and risk management professionals can help identify potential pure risks and develop strategies to manage them.

Why is pure risk important?

Pure risk is important because it can result in significant financial losses if not managed properly. By identifying and managing pure risk, individuals and organizations can reduce their exposure to financial losses and protect their assets.

For businesses, managing pure risk is especially important because it can impact their ability to operate and grow. A significant loss due to pure risk can result in bankruptcy and the closure of the business.

How to manage pure risk?

Managing pure risk involves several strategies, including:

Purchasing insurance

Insurance is one of the most common ways to manage pure risk. By purchasing insurance, individuals and businesses transfer the risk of financial loss to an insurance company.

Implementing safety measures

Implementing safety measures can help reduce the likelihood and severity of pure risk. For example, installing smoke detectors and fire suppression systems can reduce the risk of fire-related losses.

Diversifying investments

Diversifying investments can help manage the risk of financial loss due to market fluctuations. By investing in a variety of assets, individuals and businesses can reduce their exposure to pure risk.

Developing contingency plans

Developing contingency plans can help minimize the impact of pure risk if it occurs. Contingency plans should outline the steps to be taken in the event of a loss, including how to mitigate the impact and recover from the loss.

Conclusion

Pure risk is a type of risk that can result in significant financial losses if not managed properly. By identifying and managing pure risk, individuals and organizations can reduce their exposure to financial losses and protect their assets. Strategies for managing pure risk include purchasing insurance, implementing safety measures, diversifying investments, and developing contingency plans.