Which type of risk is represented by a building burning down?

The scenario of a building burning down exemplifies pure risk. Pure risk refers to situations that can only result in a loss or no loss at all; there is no potential for a gain. In the case of a fire destroying a building, the outcome is straightforward—the building may be entirely lost or remain intact, but there is no opportunity for profit or financial gain from the event itself.

This concept is foundational in risk management because it underscores risks that are insurable, such as property damage caused by natural disasters, accidents, or other unforeseen events. Insurance companies often cover pure risks because they help mitigate the financial impact of losses that individuals and businesses experience due to such events.

Understanding pure risk is crucial as it allows individuals and organizations to recognize which risks can be managed through insurance and loss control measures, ensuring they have the necessary protections in place against potential losses.