While all have uses, the most commonly cited construction is based on speculative and pure risks.
Although business risk involves both speculative and pure risks, the focus of this study is on pure risk.
What is the firm's level of risk exposures in terms of speculative risks namely commodity, foreign exchange and interest rate risks and pure risks namely physical assets, human resource, legal liabilities and work related risks?
First, we have exposures for pure risks
and projects for speculative risks.
Risk Management: Management of the pure risks
to which a company might be subject.
This may relate to a desire to control one's environment: generally, one must actively seek out speculative risks, whereas one reacts to the pure risks that are effectively thrust upon him or her.
For pure risks, by contrast, the authors find the Pratt-Arrow measure of relative risk aversion to be parabolic in both components of wealth: initially increasing and then decreasing in noncontingent assets, and initially decreasing and later increasing in human capital.
1966, Attitudes Toward Speculative Risks as an Indicator of Attitudes Toward Pure Risks, Journal of Risk and Insurance, 33(4): 577-586.
The responsibilities of risk managers have evolved beyond a concentration on buying insurance to encompass sophisticated approaches to financing loss through various methods that can include self-insurance, larger retentions, contractual transfers, bonds or commercial insurance for losses arising from pure risks.
Today, there are risk managers who manage pure risk, those who manage speculative risk and a growing number who address both.
In fact, utilizing their definition of risk shifting (risk transfer), both the parent and unrelated insureds appear to shift their pure risks (exposures) to the captive and eventually back to the parent as a speculative ownership risk after the economic dynamics of the loss and premium pooling process have been completed.
A parent can substantially shift all of its pure risks under consideration to a financially unrelated insurer through insurance purchased in the market involving an independent arms-length transaction, while the parent retains some of its exposure and risk indirectly when captive insurance is utilized.