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Foundations of Casualty Actuarial Science

most common are “objective” versus “subjective and
“pure” versus “speculative”.

“Objective risk” is the risk that exists in nature and is
the same for all persons or entities facing the same
situation. An example is the variation in number of heads
in ten coin flips. Sometimes the objective risk can not be
determined. For example, to know the number of
earthquakes of a certain magnitude in certain area in a
certain time period, one would have to know the exact
probability distribution for this situation.

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

Q3. Distinguish between pure and speculative
risk.

Ans. Pure risk exists when there is a chance of loss but no

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