A Theory of Pure Risk Management in the Business Firm

All forms of economic activity are confronted with two basic types of financial risks: (1) pure risks, which involve a potential loss only and are generally viewed to be incidental to the entrepreneurial function, such as a fire loss; (2) speculative risks, which involve both a potential loss and gain and are the prime focus of the entrepreneurial function, such as investment.' The subject of this paper is confined to the management of pure risks by modern business firms. Since the turn of the twentieth century, business managers have been increasingly concerned over the expanding areas of property, liability and personnel pure risk exposures. Some of these risks involve catastrophic losses whose occurrence, without advance planning, could deprive the firm from the means of continuity. Moreover, protecting the firm's assets and personnel against pure risks requires the