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Difficulty: EasyDefinition and Types of Risk

An entrepreneur opening a new retail store faces the possibility that the business will fail and lose money, but also the possibility that it will succeed and generate a profit; this situation represents a pure risk and is therefore eligible for standard commercial insurance coverage.

Answer: Answer

Answer

False
The statement is false because opening a business with the chance of profit or loss is a speculative risk, not a pure risk. Only pure risks, which involve no possibility of gain, are generally insurable.

Step-by-Step Solution

1
Analyze the possible outcomes described in the scenario.
The scenario explicitly states the entrepreneur could either lose money (business failure) or generate a profit (business success).
Identifying the potential outcomes is required to classify the nature of the risk.
2
Classify the risk based on the identified outcomes.
Because there is a possibility for financial gain, this is classified as a speculative risk.
Pure risks only offer the chance of loss or no loss. Speculative risks offer the chance of gain, loss, or breaking even.
3
Determine the insurability of the classified risk.
Speculative risks are uninsurable.
Standard insurance policies are designed to indemnify against pure risks, not to protect against poor business decisions or guarantee investment returns.

Key Concept

Distinguishing between pure risks and speculative risks, and their insurability.
Estimated Time:30s
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Topics

Definition and Types of Risk

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