Difficulty: Easy

Average Score: 100%

Which of the following statements regarding risk is TRUE?

Rationale

Only pure risks are insurable.

Pure risks involve situations that can only result in a loss or no loss, making them suitable for insurance coverage. Since insurance is designed to protect against losses, only pure risks—such as theft, fire, or natural disasters—are typically insurable, while speculative risks involve the possibility of gain or loss, which insurance does not cover.

A (Only pure risks are insurable.) CORRECT

Pure risks are defined as risks that can only result in a loss or no loss, making them eligible for insurance. Insurers can assess and calculate the likelihood of these risks, allowing them to provide coverage. This foundational principle of insurance ensures that policyholders are compensated for losses without the element of potential gain that complicates speculative risks.

B (Only speculative risks are insurable.) YOUR ANSWER

Speculative risks involve scenarios where there is a chance of both loss and gain, such as investing in the stock market or starting a business. Insurance does not cover these risks because they are unpredictable and can result in profit, which goes against the traditional purpose of insurance that focuses on loss mitigation.

C (Both pure and speculative risks are insurable.) YOUR ANSWER

This statement is incorrect as it suggests that insurance can cover speculative risks, which it does not. Insurance companies operate under the premise of covering only pure risks, since speculative risks lack the predictability and calculable loss that insurance requires for sustainable risk management.

D (Neither pure nor speculative risks are insurable.) YOUR ANSWER

This choice is misleading because it denies the existence of insurable risks. Pure risks are indeed insurable, which contradicts the statement. Insurance fundamentally exists to manage and mitigate pure risks, while speculative risks remain outside the scope of insurable practices.

Conclusion

In summary, insurance is designed specifically to cover pure risks, which involve potential losses with no possibility of gain. Speculative risks do not fit within this framework, as they encompass both loss and gain, thereby making them uninsurable. Understanding the distinction between these two types of risks is crucial for effective risk management and insurance practices.

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