South Carolina Personal Lines Practice Exam

Which type of risk is insurable?

1. Pure risk

2. Speculative risk

3. Market risk

4. None of these

The correct answer is: Pure risk

Pure risk is considered the only type of risk that is insurable because it involves situations that can result in a loss or no loss, but not a gain. This aligns with the fundamental principles of insurance, which are based on the pooling of risks and financial compensation for losses. For example, in events such as property damage, theft, or natural disasters, there is a clear potential for loss that can be quantified, making it suitable for insurance. In contrast, speculative risk includes situations where there is a chance of loss or gain, like investing in stocks or starting a new business. Since speculative risks can lead to both positive and negative outcomes, they do not align with the typical insurance model, which is designed to protect against assured negative outcomes. Market risk, similarly, pertains to the possibility of financial loss due to fluctuations in market conditions, and it too is not insurable because it involves a range of outcomes influenced by various external factors.