South Carolina Life Insurance Practice Exam

What type of risk is characterized by a certainty of loss or no loss?

1. Speculative risk

2. Pure risk

3. Insurable risk

4. Non-insurable risk

The correct answer is: Pure risk

A type of risk characterized by a certainty of loss or no loss is known as pure risk. Pure risks are those situations where there are only two possible outcomes: either a loss occurs or no loss occurs at all. This contrasts with speculative risks, which involve a possibility of gain or loss, and typically encompass investments and gambling scenarios. Pure risk is the foundation of most insurance policies since insurers are willing to cover risks where they can predict potential losses. Events like theft, fire, and natural disasters reflect pure risks because they can either happen (resulting in a loss) or not happen (resulting in no loss). Therefore, this kind of risk is insurable, making it important for insurance discussions and practices. In contrast, speculative risk includes scenarios that involve the possibility of profit, which are not insurable, as insurers cannot reliably predict outcomes in situations that may result in financial gain. Non-insurable risks refer to risks that an insurance company will not cover due to their nature or volatility. Insurable risk is a broader concept that can include aspects of pure risk but doesn't solely define the outcome as a certainty of loss or no loss. Understanding these distinctions is crucial as they form the basis for how insurance products are structured and what they cover.