Risk means a chance of loss.

Speculative Risk – exists when there is a chance of loss and also a chance for profit i.e. gambling at a casino – these risks cannot be insured against.

Pure Risk – exists when there is a chance of loss but no chance of profit i.e..: driving an asset- these risks can be insured against.

Broadly, there are three choices:

(1) Eliminate the risk: implement preventive measures to reduce risk i.e..: fire alarms, sprinklers, seat belts.

(2) Assume the risk: bear the cost of losses as they occur or set aside an amount of money periodically in order to self insure against losses.

(3) Transfer the risk: transfer the risk to someone whose financial capability to handle a loss is greater than your own. This risk transfer comes at a price and is called insurance. (Hunter Keilty Muntz & Beatty)

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