Alabama Property and Casualty Practice Exam

Insurance contracts typically offset which type of risk?

1. Speculative risk

2. Pure risk

3. Gambling

4. Created risk

The correct answer is: Pure risk

Insurance contracts primarily offset pure risk, which refers to the possibility of loss or no loss, but not the chance of gain. Pure risks are insurable events that are uncertain in their occurrence but will definitely result in some form of loss or damage if they do occur. Examples of pure risks include events like fires, accidents, or natural disasters; these are situations where one can only experience a financial loss. On the other hand, speculative risk involves both the possibility of loss and the opportunity for gain, such as investing in stock or gambling. Insurance does not cover speculative risks because these scenarios are inherently based on chance and profit motives. Similarly, while created risk might stem from business decisions or other strategic choices, it does not fall within the typical realm of insurable risks. Understanding that insurance is designed to provide protection against unpredictable and unavoidable losses is crucial when distinguishing between the different types of risks. Thus, the focus on pure risk illustrates the role of insurance in providing financial security against loss without the added complexities and uncertainties found in speculative scenarios.