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Difficulty: MediumDefinition and Types of Risk

When an entrepreneur opens a new insurance brokerage, the potential for the agency to be sued by a client for professional negligence is classified as a pure risk, whereas the financial capital invested to start the agency is classified as a speculative risk.

Answer: Answer

Answer

True
The statement correctly distinguishes between the two primary classifications of risk. Pure risks, such as liability exposures from professional negligence, involve only the chance of loss or no loss and are the focus of traditional insurance. Speculative risks, such as investing capital into a new business venture, involve the chance of gain as well as loss and are generally not insurable.

Step-by-Step Solution

1
Analyze the first risk scenario: the potential for a professional negligence lawsuit.
Identify that a lawsuit can only result in a financial loss (such as paying damages or defense costs) or no loss (if dismissed), meaning there is no opportunity for financial gain.
To classify the nature of the legal liability risk based on its possible outcomes.
2
Analyze the second risk scenario: the financial capital invested to start the agency.
Identify that starting a business venture can result in a loss (if it fails), no loss (breaking even), or a gain (if it becomes profitable).
To classify the nature of the entrepreneurial financial risk based on its possible outcomes.
3
Apply the insurance definitions of pure and speculative risks to the analyzed scenarios.
The lawsuit threat aligns with the definition of a pure risk, while the business investment aligns with the definition of a speculative risk. The statement correctly classifies both.
To determine the final truth value of the statement.

Key Concept

Distinguishing between pure risks (insurable, chance of loss only) and speculative risks (uninsurable, chance of loss or gain).
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Topics

Definition and Types of Risk

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