Property and Casualty Insurance Practice Exam

What type of risk involves only the possibility of loss?

1. Speculative Risks

2. Pure Risks

3. Incidental Risks

4. Calculated Risks

The correct answer is: Pure Risks

Pure risks are characterized by the presence of only the chance of loss, with no opportunity for financial gain. This type of risk encompasses situations where outcomes can only result in a negative impact, such as damage to property, injury, or loss of life. For example, risks associated with natural disasters, accidents, and certain health conditions fall under the category of pure risks, as they do not offer a possibility of profit, only potential losses. In contrast, speculative risks include situations where there is both the potential for gain and the possibility of loss, such as investing in stocks or real estate. Incidental risks are typically minor risks associated with activities or obligations but do not represent a fundamental type of risk. Calculated risks involve situations where an individual or organization weighs the potential for loss against the gains, making informed decisions based on analyzing potential outcomes. Understanding the nature of pure risks is crucial for effective risk management, particularly in insurance, where protecting against these certain losses is a primary focus.