Risks
Pure Risk - Insurable
Speculative Risk - Un-insurable
MR. WATSON: What is a risk ? It's a chance happening. A risk is a chance. There are two types of risk.
- One is called a pure risk
- The other one is a speculative risk
Let's start with the definition of a speculative risk. It has the chance for loss or gain. Insurers will not insure speculative risks.
Have you ever played the lottery?
STUDENTS: Oh, yeah.
MR. WATSON: Could you win?
STUDENTS: Yeah.
MR. WATSON: Could you lose?
STUDENTS: Oh, yes.
MR. WATSON: You can not insure speculative risks.
MR. WATSON: If you buy or sell stocks. Could you win?
STUDENTS: Yes.
MR. WATSON: Could I lose?
STUDENT: Yes.
MR. WATSON: You can't buy insurance on it. If it has a chance for gain, that's a speculative risk, and insurance companies will not let you insure it.
MR. WATSON: Let me give you another example. I go to the dog track. Can I insure my bet at the dog track? No.
If I owned the dog, can I insure the dog?
STUDENTS: Yes.
MR. WATSON: Insurance companies will only insure pure risks , and a pure risk only has the chance for loss. If the dog died, i would lose. If the dog did not die, i did not gain.
Let's get something straight. In life, you can either win, lose, or stay the same. Do you agree?
STUDENTS: Yes.
MR. WATSON: A pure risk has only the chance for loss.
STUDENT: You said the dog was a pure risk because he could die.
MR. WATSON: If you owned the dog and that dog was shot, would you suffer financially?
STUDENT: Yes.
MR. WATSON: But if he wasn't shot, are you better off? Are you in a better position than you were?
STUDENT: No.
MR. WATSON: Do you have a dog?
WOMAN: Yes.
MR. WATSON: Was he shot last night?
WOMAN: No.
MR. WATSON: Are you better off because he wasn't shot last night?
WOMAN: I guess not.
MR. WATSON: When you went to bed last night, the dog was not shot. You woke up this morning and the dog was still not shot. Are you better off, worse off, or the same? You are the same as when you went to bed last night. Would you agree?
WOMAN: Yes.
MR. WATSON: So with a dog, that would be a pure risk. You only stand to lose financially if the dog died. Do you agree?
WOMAN: I guess.
MR. WATSON: How would you gain if the dog didn't die?
WOMAN: Happiness. Emotional fulfillment.
MR. WATSON: You already had happiness, emotional fulfillment. What you need is a puppy!
(Laughter.)
MR. WATSON: You are the same.
MR. WATSON: Here's another example.
MR. WATSON: Is a plane flight a pure risk or a speculative risk?
STUDENT: It's a pure risk.
MR. WATSON: Two types of risk -- what are they? Pure and speculative . Which one can we insure? Pure .
MR. WATSON: So insurance companies are going to determine if it is a pure risk or a speculative risk. Insurance companies insure pure risks. As an example they will insure against fire. What will increase the chance of that fire occurring in the house? A hazard . Does that make sense? Yes or no.
STUDENTS: Yes.