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Difficulty: MediumDefinition and Types of Risk

Horizon Logistics recently purchased a fleet of autonomous delivery drones and also acquired shares in a competing logistics firm. Management is concerned about various financial exposures and decides to evaluate their operational vulnerabilities. According to the definitions of risk in insurance, which of the following exposures faced by Horizon Logistics represents a pure risk?

  1. The possibility that the newly purchased delivery drones are destroyed by a severe windstorm.Answer
  2. B
    The chance that the acquired shares in the competing firm will significantly decline in market value.
  3. C
    The decision to permanently halt all drone deliveries in neighborhoods with historically high rates of vandalism.
  4. D
    The failure of the maintenance crew to regularly update the anti-collision software on the drones.

Answer

The possibility that the newly purchased delivery drones are destroyed by a severe windstorm represents a pure risk because it presents only the possibility of loss or no loss.
The correct answer accurately identifies a situation where there is only a possibility of loss (damage) or no loss (no damage) occurring. This defines a pure risk, which is the only type of risk that insurance companies typically accept.

Step-by-Step Solution

1
Analyze the scenario to differentiate between pure and speculative risks.
Identify that pure risks involve only the chance of loss or no loss, whereas speculative risks involve the chance of either loss or gain.
Insurance is designed to restore an insured to their previous financial condition, making only pure risks insurable.
2
Evaluate the financial investment exposure.
The acquisition of competitor shares can result in a profit or a loss, making it a speculative risk.
Speculative risks are inherently uninsurable in the standard insurance market.
3
Distinguish between the risk itself, hazards, and risk handling methods.
Halting operations is risk avoidance (a handling method), and failing to update software is a hazard (increases chance of loss). The windstorm damaging drones is the only pure risk.
Accurate classification of exposures is necessary to determine which aspects of a business can be transferred to an insurer.

Key Concept

Pure vs. Speculative Risk
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Topics

Definition and Types of Risk

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