Similarly, individuals purchase insurance coverage to protect their families, their property, and themselves. Risk may be classified as either a speculative risk or a pure risk. A speculative risk is a risk that accompanies the possibility of earning a profit. A pure risk is a risk that involves only the possibility of loss, with no potential for gain.
Any risk entails two types of costs.
The first is the cost that will be incurred if a potential loss becomes an actual loss. The second consists of the costs of reducing or eliminating the risk of potential loss. There are situations in which risk avoidance is a practical technique. At the personal level, individuals who stop smoking or refuse to walk through a dark city park are avoiding risks. At the business level, firms can take a number of steps to avoid risk.