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Difficulty: MediumDefinition and Types of Risk

A commercial property developer purchases an abandoned industrial site, hoping its value will appreciate significantly after city renovations, while simultaneously facing the ongoing threat of vandalism to the property. According to foundational insurance principles, both the investment in the land's future value and the threat of vandalism are classified as pure risks because both possess the potential to cause severe financial harm to the developer.

Answer: Answer

Answer

False
The statement is fundamentally false because it incorrectly categorizes a real estate investment—which inherently includes the potential for financial gain—as a pure risk. Pure risks involve only the possibility of loss or no loss (such as the vandalism threat), while speculative risks involve the chance of loss, no loss, or gain. Insurers generally only accept pure risks.

Step-by-Step Solution

1
Analyze the first exposure (purchasing the industrial site for appreciation).
This situation presents the possibility of financial gain (value increases), financial loss (investment fails), or no change.
Identifying all possible outcomes is necessary to classify the risk type accurately.
2
Analyze the second exposure (threat of vandalism).
This situation presents only the possibility of loss (damage occurs) or no change (no damage occurs), with absolute zero possibility for profit.
Differentiating exposures based on potential outcomes separates speculative risks from pure risks.
3
Evaluate the statement's conclusion based on standard insurance definitions.
The statement incorrectly classifies both exposures as pure risks, failing to recognize the investment as a speculative risk.
Insurance principles strictly define pure risk as an exposure having no potential for financial gain.

Key Concept

Distinguishing Between Pure and Speculative Risks
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Topics

Definition and Types of Risk

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