Property and Casualty Insurance Practice Exam

What term describes the possibility of both gain and loss, and is not insurable?

1. Pure risk

2. Speculative risk

3. Control risk

4. Calculated risk

The correct answer is: Speculative risk

The term that describes the possibility of both gain and loss, which is not insurable, is speculative risk. Speculative risk involves situations where there is a chance of financial gain as well as a chance of financial loss, making it fundamentally different from pure risk, which only includes the chance of loss or no loss. For example, investing in the stock market is a speculative risk because an investor might gain profit if stock prices rise or incur a loss if they fall. This characteristic of having both potential outcomes is what sets speculative risk apart, making it uninsurable. Insurance typically covers only pure risks, such as fire, theft, or natural disasters, where the outcome is solely loss or no loss, rather than scenarios that can yield positive outcomes. Other types of risks mentioned, such as control risk and calculated risk, do not accurately capture this duality of potential gain and loss. Control risk typically pertains to the risk of loss due to inadequate controls in a business system, focusing more on management and operational aspects rather than the financial prospects involved in speculative activities. Calculated risk refers to risks where decisions are made consciously and with analysis but does not inherently imply the possibility of gain versus loss.