Examkin

Question

Difficulty: MediumDefinition and Types of Risk

A commercial shipping company faces the possibility of a cargo vessel sinking during a severe storm, as well as the possibility of financial loss due to a sudden decline in global shipping rates. Because both of these scenarios can cause significant financial harm to the business, they are both classified by the insurance industry as pure risks.

Answer: Answer

Answer

False
The statement is false because it incorrectly classifies a market fluctuation as a pure risk. Only the potential sinking of the vessel is a pure risk (offering no chance for profit). The fluctuation in global shipping rates is a speculative risk because the rates could potentially increase, offering the shipping company a chance for financial gain.

Step-by-Step Solution

1
Analyze the first risk exposure described in the scenario: the cargo vessel sinking in a storm.
This event presents only two possible outcomes: a loss occurs (the ship sinks) or no loss occurs (the ship safely reaches port without incident).
Identifying the potential outcomes of an exposure is required to determine its fundamental risk classification.
2
Analyze the second risk exposure: a sudden decline in global shipping rates.
Global shipping rates fluctuate based on market dynamics. While they can decline and cause a loss, they can also increase and create a financial gain (profit) for the shipping company.
Determining whether a financial gain is a possible outcome distinguishes a speculative risk from a pure risk.
3
Compare the findings against the definition of a pure risk to evaluate the accuracy of the overall statement.
Because the shipping rate fluctuation presents a chance of financial gain, it is a speculative risk, not a pure risk. Therefore, the statement classifying both as pure risks is incorrect.
Insurance principles distinctly separate these two categories of risk, as only pure risks are generally insurable.

Key Concept

Distinguishing between pure risks (loss or no loss) and speculative risks (loss, no loss, or gain).
Rate this question

Topics

Definition and Types of Risk

More questions from this topic