Property and Casualty Insurance Practice Exam

Why is pure risk considered insurable?

1. It involves potential gains

2. It only involves the possibility of loss

3. It is always manageable

4. It is predictable

The correct answer is: It only involves the possibility of loss

Pure risk is considered insurable primarily because it only involves the possibility of loss. This type of risk does not include opportunities for financial gain, but rather encompasses situations where there is a chance of a negative outcome, such as damage to property or liability for injuries. Insurance is designed to protect individuals and businesses from these potential losses, providing financial compensation when a loss occurs. The insurability of pure risk is rooted in its objective nature, which allows insurers to assess, price, and manage these risks effectively. By focusing solely on outcomes that result in loss, insurers can create policies, calculate premiums, and set reserves based on the likelihood and potential severity of these events. In contrast, options that suggest insurable risks involve potential gains, are always manageable, or inherently predictable do not accurately capture the essence of pure risk. Insurance aims to mitigate loss, not to capitalize on gains or assume that all risks can be controlled or anticipated with certainty. Thus, the foundation of insurance rests on the handling of situations where loss is the only possible outcome, making pure risk uniquely insurable.