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Difficulty: EasyDefinition and Types of Risk

An individual purchases a new car and faces the possibility that the vehicle might be damaged in a collision. Since this situation presents only a chance of financial loss or maintaining the current state (no loss), with no opportunity for financial gain, which of the following terms best describes this exposure?

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

Answer

Pure risk
The correct answer accurately identifies that a situation presenting only the possibility of loss or no loss (with no chance for profit) is fundamentally defined as a pure risk. This is the specific type of risk that standard insurance policies are designed to cover.

Step-by-Step Solution

1
Analyze the scenario to identify the potential outcomes of the situation described.
The scenario explicitly states there is only a chance of loss or no loss, and absolutely no opportunity for financial gain.
Identifying the possible outcomes is necessary to classify the specific type of risk.
2
Match the identified outcomes to standard insurance definitions.
A situation with only a chance of loss or no loss defines a pure risk, whereas a situation that includes a chance of gain defines a speculative risk.
Applying standard insurance terminology correctly categorizes the exposure and determines its insurability.

Key Concept

Pure Risk vs. Speculative Risk
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Topics

Definition and Types of Risk

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