David owns an independent bookstore. He recently purchased a rare, antique manuscript for $15,000, anticipating he can sell it at a substantial profit, although its market value could also decline. Separately, he is concerned about the possibility that a roof leak during a severe storm could destroy his existing book inventory. According to fundamental insurance principles, which of the following statements correctly classifies these exposures?
- The manuscript purchase is a speculative risk which is uninsurable, whereas the potential for inventory damage is a pure risk which is generally insurable.Answer
- BBoth the manuscript purchase and the potential for inventory damage are pure risks because they both involve the possibility of a financial loss.
- CThe manuscript purchase is a speculative risk, and the severe storm is a physical hazard; neither of these exposures can be transferred to an insurance company.
- DThe manuscript purchase is a speculative risk that can be transferred to an insurer, while the potential for inventory damage must be handled through risk avoidance.
Answer
The manuscript purchase represents an uninsurable speculative risk, while the potential for inventory damage is an insurable pure risk.
The correct answer accurately applies the foundational definition of risk types. A speculative risk involves the chance of both loss and gain (like investing in a rare manuscript) and is generally uninsurable. A pure risk involves only the chance of loss or no loss (like potential water damage to inventory) and is the specific type of risk that insurance companies are designed to cover.
Step-by-Step Solution
Key Concept
Definition and Types of Risk