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Difficulty: HardDefinition and Types of Risk

While a commercial enterprise can use property insurance to mitigate the pure risk of inventory destruction caused by a natural disaster, the potential financial loss resulting from a newly introduced competitor rendering that same inventory technologically obsolete is also classified as a pure risk because the enterprise has no direct control over external market forces.

Answer: Answer

Answer

False
The statement is false because financial loss due to market competition and technological obsolescence is a speculative risk. Speculative risks involve the possibility of either loss or gain and are generally uninsurable, unlike pure risks which strictly present a possibility of loss or no loss.

Step-by-Step Solution

1
Analyze the first scenario presented in the statement.
Inventory destruction caused by a natural disaster is correctly identified as a pure risk because it only presents a chance of loss or no loss.
Establishing the baseline definition of pure risk used in the first half of the statement.
2
Analyze the second scenario presented in the statement.
Financial loss from a competitor rendering inventory obsolete is driven by market competition and consumer demand.
Identifying the fundamental nature of the exposure in the second half of the statement.
3
Apply the definitions of pure and speculative risk to the second scenario.
Market competition inherently involves the chance for either financial gain (if the enterprise outperforms competitors) or loss (if the enterprise is outcompeted). Therefore, this is a speculative risk, not a pure risk.
Determining the correct risk classification based on the possibility of gain, regardless of the enterprise's lack of control over the competitor.

Key Concept

Distinguishing between pure risks and speculative risks based on the potential for financial gain.
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Topics

Definition and Types of Risk

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