Florida 2-20 General Lines Agent (Property, Casualty, Commercial Lines and Florida Law)General InsuranceEasy
A Florida General Lines Agent is explaining the concept of 'pure risk' to a new client. Which of the following scenarios best exemplifies a pure risk?
- AA homeowner's property being damaged by a hurricane, resulting in financial loss.
- BInvesting in a volatile stock market with the potential for high gains or significant losses.
- COperating a small business with the chance of making a profit or experiencing a loss.
- DGambling at a casino where the outcome can be either a win or a loss of money.
Show answer & explanationAnswer & explanation
Correct answer: A. A homeowner's property being damaged by a hurricane, resulting in financial loss.
Pure risk involves only the possibility of loss or no loss, with no chance of gain. Damage from a hurricane is a classic example of pure risk, as there is no potential for profit from such an event.
Why the other options are wrong
- B. This is a speculative risk, as there is a chance of gain.
- C. This is a speculative risk, as there is a chance of profit.
- D. This is a speculative risk, as there is a chance of winning.
Pure Risk
A type of risk where there is only the possibility of loss or no loss, with no chance of financial gain.
- Insurable, as losses are predictable.
- No potential for profit.
- Examples include natural disasters, accidents, death.
Memory trick: Pure risk means 'purely' a chance of loss, never a gain.