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Difficulty: MediumDefinition and Types of Risk

A commercial manufacturer's exposure to a potential factory fire is classified as a pure risk, whereas its strategic decision to launch a new product line in an untested market is classified as a speculative risk; under traditional insurance principles, only the pure risk is eligible for coverage.

Answer: Answer

Answer

The statement is True.
The statement is entirely correct. Pure risk involves only the chance of loss or no loss (e.g., a physical peril like fire), which serves as the foundation of insurable risks. Speculative risk involves the chance of loss, no loss, or gain (e.g., a strategic business investment or product launch), which insurance companies will not cover because doing so would require them to underwrite the business's market success.

Step-by-Step Solution

1
Analyze the first scenario regarding the potential factory fire.
The factory fire presents a situation where only loss or no loss can occur, with no opportunity for profit.
This aligns perfectly with the standard definition of a pure risk.
2
Analyze the second scenario regarding the launch of a new product line.
The product launch presents a situation where the manufacturer could lose money, break even, or generate a significant profit.
This potential for financial gain classifies the scenario as a speculative risk.
3
Evaluate the insurability of both risk types according to insurance principles.
Traditional insurance policies are designed to indemnify against pure risks but exclude speculative risks.
Insurance is meant to restore the insured to their prior financial condition, not to guarantee business profitability or protect against poor strategic investments.

Key Concept

Distinguishing between pure risks (insurable) and speculative risks (uninsurable).
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Topics

Definition and Types of Risk

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