Insurance Broker Certification Practice Exam

Which type of risk is exclusively accepted by insurance companies?

1. Speculative risk

2. Systematic risk

3. Pure risk

4. Market risk

The correct answer is: Pure risk

Insurance companies specifically accept pure risk because it involves situations that can only result in a loss or no loss, with no possibility of a profit. Pure risks are typically associated with events such as accidents, natural disasters, and health issues, which are insurable because they present a clear risk that needs to be managed. Insurance is designed to provide a safety net for policyholders against these predictable events that can lead to financial loss, enabling them to share the risk across a larger pool. In contrast, speculative risk, which involves the chance of loss or gain, is not insurable because it includes investments and entrepreneurial ventures where outcomes can vary significantly. Systematic risk pertains to the broader economic factors that affect the market as a whole and cannot be mitigated through insurance, while market risk is associated with changes in market conditions that can affect investments rather than insurable events. Therefore, pure risk fits within the scope of insurance because it can be quantified and managed effectively through policies and premiums.