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Difficulty: EasyDefinition and Types of Risk

Purchasing a rare painting with the expectation that its market value will increase over the next decade is an example of a pure risk, making it an insurable exposure.

Answer: Answer

Answer

False
The statement is false because investing in an asset for potential appreciation creates a distinct chance for financial gain. Situations that present a chance for either loss or gain are speculative risks, which are generally uninsurable.

Step-by-Step Solution

1
Analyze the scenario to identify the potential financial outcomes.
The purchase of the painting could result in either a financial gain (if the value increases) or a loss (if the value decreases).
Identifying the possible outcomes is necessary to classify the specific type of risk involved.
2
Compare the identified outcomes to the foundational definitions of risk types.
A situation offering a chance of either loss or gain matches the definition of a speculative risk.
Standard insurance principles categorize risks strictly based on their potential for gain versus loss.
3
Determine insurability based on the established risk classification.
Since it is a speculative risk, it is not an insurable exposure.
Insurance is designed to indemnify against pure risks (loss or no loss), not to protect speculative 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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