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Difficulty: MediumDefinition and Types of Risk

A real estate developer faces the possibility of a newly constructed apartment complex being damaged by a severe earthquake, while also facing the uncertainty of whether local rental rates will increase or decrease over the next five years. For insurance purposes, the earthquake exposure is classified as a pure risk, whereas the fluctuation in rental rates is considered a speculative risk.

Answer: Answer

Answer

True
The statement accurately applies the fundamental definitions of risk. Pure risk involves only the chance of loss or no loss (like property damage from a natural disaster) and is insurable. Speculative risk involves the chance of loss, no loss, or gain (like market price fluctuations or business investments) and is generally not insurable.

Step-by-Step Solution

1
Analyze the first exposure (earthquake damage) to determine its risk classification.
An earthquake can only cause damage (a loss) or not happen (no loss). There is no possibility of financial gain from the earthquake itself.
Identifying whether there is a chance for gain is the key distinction between risk types.
2
Analyze the second exposure (rental rate fluctuations) to determine its risk classification.
Rental rates going up would result in a financial gain, while rates going down would result in a loss. Since there is a chance for profit, this is a speculative risk.
Speculative risks involve the possibility of gain, loss, or no change.
3
Compare the findings with the statement provided in the stem.
The statement correctly identifies the earthquake as a pure risk and the rental rate fluctuation as a speculative risk.
This confirms the entire statement is fundamentally accurate.

Key Concept

Pure vs. Speculative Risk
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Topics

Definition and Types of Risk

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