Insurance Broker Certification Practice Exam

Why is a pure risk considered unique for insurance companies?

1. It offers opportunities for profit

2. It can result in loss or financial gain

3. It presents no opportunity for financial gain

4. It is the most common type of insured risk

The correct answer is: It presents no opportunity for financial gain

A pure risk is characterized by the possibility of loss but no chance of financial gain. This is what makes it unique and specifically insurable; it focuses solely on potential negative outcomes, such as damage to property, injury, or loss of life. Insurance companies exist to help individuals and businesses manage these risks by providing financial protection in case of such incidents. Pure risks are distinct from speculative risks, which involve the potential for both loss and gain. Since pure risks only lead to potential loss, they allow insurance companies to operate on a predictable basis, enabling actuaries to calculate premiums effectively based on the likelihood and impact of potential losses. In contrast, options suggesting potential for profit or financial gain would apply to speculative risks rather than pure risks. The insurance model thrives on the certainty that pure risk does not involve financial gain, focusing on safeguarding against unexpected adverse events. Therefore, the characterization of pure risk as one that presents no opportunity for financial gain aligns perfectly with the fundamental principles of insurance.