Property and Casualty Insurance Practice Exam

Which of the following is a characteristic of pure risks?

1. Possibility of profit

2. Only the potential for loss exists

3. Includes both profit and loss

4. Impacts only large corporations

The correct answer is: Only the potential for loss exists

Pure risks are defined by the fact that they only involve the possibility of loss or no loss, with no potential for profit involved. This characteristic differentiates pure risks from speculative risks, where there is an opportunity for both financial gain and loss. In terms of understanding risk types, pure risks typically encompass scenarios such as natural disasters, personal injury, or damage to property, where the outcomes can either be a loss or no occurrence of that loss. Thus, the only outcome for pure risk is the potential for loss, making the option indicating that only the potential for loss exists the correct choice in this context. This concept is foundational in the field of risk management and insurance, as it plays a critical role in how insurance products are structured, priced, and sold. Recognizing the unique nature of pure risks is essential for effective risk assessment and for developing strategies to manage those risks responsibly.