California Life and Health Insurance Practice Exam

Which of these statements correctly describes risk?

1. Pure and speculative risks are both insurable

2. Only pure risks are insurable

3. Speculative risks can be insured under special circumstances

4. Risks cannot be insured at all

The correct answer is: Pure and speculative risks are both insurable

The correct understanding of risk in the context of insurance is that pure risks are those that can lead to a loss or no loss, with no opportunity for gain. They are typically insurable because they are predictable, such as the risk of fire, theft, or natural disasters. On the other hand, speculative risks involve the chance of loss or gain, such as investing in the stock market or starting a business. While speculative risks are generally not insurable, there are rare cases where they can be covered through specialized insurance products, but this is the exception rather than the rule. Thus, the statement asserting that both pure and speculative risks can be insured presents a misunderstanding of standard insurance principles. The assertion that only pure risks are insurable accurately reflects the conventional approach but fails to acknowledge the specific contexts where speculative risks might be insured. The idea that risks cannot be insured at all is incorrect since pure risks form the foundation of most insurance coverage. Therefore, while option A is suggestive of a broad interpretation, the best understanding is that pure risks are typically insurable and that speculative risks are generally not, except in unique circumstances.