Final answer:
Insurance manages pure risks, which are insurable, as opposed to speculative risks, which are not. Not all pure risks are insurable due to the requirements of insurance criteria and the need for actuarial fairness. The presence of moral hazard complicates insurance due to changes in policyholders' behavior.
Step-by-step explanation:
Insurance is fundamentally concerned with managing pure risks, which are uncertainties leading to a loss but no chance of gain, and are inherently insurable. On the other hand, speculative risks involve both the opportunity for gain and the possibility of loss, and are typically not insurable. Insurance companies operate on the principle of imperfect information, meaning they cannot predict specific individual losses but can estimate risk within a broader category. Given this uncertainty, not all pure risks are insurable because they might not meet the criteria insurance companies use to calculate predictable risks, like a large number of similar exposure units to base their calculations on and that the loss should be accidental and measurable.
For instance, while a particular 20-year-old male driver may have an insurable risk of an accident, not every potential risk he faces, such as betting on a sports game (a speculative risk), would be insurable. Additionally, insurance policies need to be actuarially fair, balancing the premiums paid with the expected benefits, which is complicated by the potential for moral hazard—when individuals behave differently because they are insured.