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Foundations of Casualty Actuarial Science

26. "Objective risk" is the risk that exists in nature and is the
same for all persons or entities facing the same situation.

27. "Subjective risk" is each person's or entity's estimate of
the objective risk. While the exact probability distribution
for number of earthquakes cannot be determined, it can
be estimated. The estimate of risk using the probability
distribution assumed to be correct is a subjective risk
estimate.

28. "Pure risk" exists when there is a chance of loss but no
chance of gain. For example, a homeowner has the risk
of losing all or part of his home, but no chance of gain, if
a fire occurs.

29. In "speculative risk" there is both the chance of loss and
the chance of gain. The same homeowner also has the
speculative risk that his property value will increase or
decrease over time. The most well-known form of
speculative risk is gambling.

30. In speculative risk, there is the possibility of gain or loss.

31. In pure risk, there is only the possibility of loss.

32. "Risk theory" is the use of mathematical models to
quantify objective risk as defined above.

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