South Carolina Life Insurance Practice Exam

What type of risk is characterized by a situation where a person can only experience a loss and no gain?

1. Intentional and material risk

2. Pure risk

3. Speculative risk

4. Dynamic risk

The correct answer is: Pure risk

The type of risk characterized by a situation where a person can only experience a loss and not a gain is known as pure risk. Pure risk involves scenarios where outcomes can lead only to loss or no loss, but there is no possibility for financial gain. This type of risk is primarily associated with situations such as accidents, illnesses, and natural disasters, where the only outcomes are negative. In the context of insurance, pure risk is insurable because insurers can calculate the probability of losses occurring and set premiums accordingly. Since the outcomes are limited to loss or no loss, it allows insurers to assess risk exposure effectively and provide coverage. On the other hand, speculative risk involves scenarios where there is the possibility for gain as well as the potential for loss, like investments in stocks or starting a business. Dynamic risk refers to risks that arise from changes in the environment or market conditions, and intentional risks are those that involve deliberate actions taken by an individual that could lead to loss. None of these encompass the concept of experiencing only loss without the potential for gain.