Examkin

Question

Difficulty: EasyDefinition and Types of Risk

A chef decides to use their life savings to purchase and operate a gourmet food truck. This new business venture carries the potential for significant financial profit if it becomes popular, but also carries the risk of total financial loss if it fails to attract customers. According to fundamental insurance principles, how is this specific exposure classified?

  1. Speculative riskAnswer
  2. B
    Pure risk
  3. C
    Physical hazard
  4. D
    Risk retention

Answer

Speculative risk
The correct answer accurately identifies that any exposure involving a chance of both financial gain and financial loss is classified as a speculative risk. These risks are typically uninsurable because of the inherent potential for profit.

Step-by-Step Solution

1
Identify the possible financial outcomes of the situation described in the scenario.
The scenario explicitly states there is a potential for either significant financial profit or complete financial loss.
Determining whether a situation can result in a gain is the primary factor in classifying risk types.
2
Match the identified outcomes to the correct insurance terminology.
An exposure that involves the chance of both loss and gain is defined as a speculative risk.
Insurance principles differentiate between pure risks (insurable, chance of loss only) and speculative risks (uninsurable, chance of loss or gain).

Key Concept

Speculative risks involve the possibility of both loss and financial gain, and are typically not insurable.
Rate this question

Topics

Definition and Types of Risk

More questions from this topic