What is speculative risk?

Speculative risk is characterized by the chance of experiencing a loss combined with the potential for gain. Unlike pure risk, which involves situations with only the possibility of loss and no opportunity for profit, speculative risk includes scenarios where there can be favorable outcomes as well as negative ones. For example, investing in the stock market, starting a new business, or engaging in competitive sports can involve speculative risk, as these activities carry both the chance of financial loss and the possibility of financial gain or other benefits.

Understanding speculative risk is important in the context of insurance and finance because it helps distinguish between risks that insurers typically cover (pure risks) and those that they do not (speculative risks). This distinction guides individuals in making informed decisions regarding investments and insurance policies.