What is pure risk and how does it apply in regards to insurance?
Pure risk is defined as a risk situation that presents a chance of loss only, and no chance for gain. Pure risks are insurable.
Are there other categories of risk besides pure risk?
Yes. However, before we get there we need to discuss the definition of risk. Risk is defined as the uncertainty or chance of loss. Risk is what causes people to buy insurance. The fact that you may be involved in a car accident and it could be your fault. You are legally responsible for any damage you cause while driving your car. Once you identify that risk is present you can determine how to manage it. One way to do so is to buy insurance. When you buy insurance you are transferring your risk to the insurance company in return for the premium paid.
There are two subcategories of risk which you must be aware of as you prepare to take your insurance licensing exam. They are pure risk, which we have already defined, and speculative risk.
What is speculative risk and how does it vary from a pure risk?
Speculative risk is a risk situation that presents a chance for gain, in addition to the chance of loss. Speculative risks are NOT insurable. Why? Insurance companies only want to provide protection in situations where there is a chance of loss only, and no chance for gain (pure risk).
Some examples of speculative risks, which you need to know for your test, include gambling and investing in the stock market. Think of it this way, if insurers (insurance companies) were willing to insure speculative risks they would be all over Las Vegas offering insurance for every bet placed. They don’t. Why? They will not cover speculative risks.
Check out our insurance exam prep definition article on speculative risk.
What are some examples of pure risk?
A great example of pure risk is the chance your home may burn down. What do you have to gain from that? Nothing! You can buy insurance for that. It’s called fire insurance. How about death? What do you have to gain from dying? Nothing. Well, you can buy life insurance to cover that pure risk.
Hopefully, you are getting the gist by now.
What else can help me prepare to pass my insurance licensing exam on my first attempt?
Other tips to help you pass your insurance licensing exam on your first attempt:
Also, check out our definition and question of the day videos on our YouTube channel: