What type of risk do insurance companies typically accept?

Insurance companies primarily accept pure risk, which is a type of risk that involves situations where there can only be a loss or no loss at all, with no possibility for financial gain. This type of risk is insurable and is associated with unforeseen events such as accidents, natural disasters, illness, or death. Pure risk is fundamental to the insurance industry because it allows insurers to pool resources from many policyholders, enabling them to cover the losses incurred by a few.

In contrast, speculative risk involves the possibility of both loss and gain, such as in investments or entrepreneurial ventures. Investment risk refers specifically to the uncertainty regarding the return on investment in financial instruments. Systematic risk relates to the overall market’s exposure, affecting all participants and is typically not something that insurance companies can control or underwrite. Hence, pure risk is what aligns with the nature of insurance, making it the correct choice in this context.