Classifying Pure and Speculative Risk in Film & Entertainment Organizations
09 January 2019 on Insurance Education
A risk is the combination of the uncertainty of a negative possibility occurring. In risk management, to better deal with these downside risks, we rely on the probability of these events happening.
Risk come in all different types, and as such, the tools that risk managers and thoughtful business operators use to address business risks changes according to the classification of the risk scenario.
There are many types of risk classifications and the most commonly used are as follow:
Pure and Speculative risk
Subjective and Objective risk
Diversifiable and Nondiversifiable risk
Hazard, Operational, Financial & Strategic
To learn about these categories of risk, while useful in the study of risk management, is not as useful as knowing the difference between pure and speculative risk as it relates to insurance for film and entertainment.
A pure risk is one in which there is a binary outcome of a loss or no loss. That is to stay, in the event of a pure loss, there is zero chance for gain. An example of a pure risk scenario is one in which your film production experiences an out of control fire that burns rented equipment and props, sets and wardrobe; your sets and equipment either burn or they don't.
However, with speculative risk, there is a chance for both upside gains or downside losses. For example, consider you make an investment in a feature film. There is a chance that your film will be picked up, widely distributed and profitable — an upside gain. However, there is also the uncertain possibility (aka risk) that your film will not be distributed or profitable, which would result in no gain or a loss.
In the insurance industry, the insurance products that are sold address many pure risks. Risks that are uncertain, possible, and tied to a probability of an outcome. That means, that pure risks are sometimes covered by policies like General Liability, Miscellaneous Equipment Rental, Cast Insurance and other lines of coverage.