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Question 1
What term describes a risk that presents only the possibility of loss, with no chance of gain?
Answer: A pure risk. Pure risks are the only type insurable because they involve only the chance of loss or no loss, never a gain.
Question 2
What type of risk involves the possibility of either loss OR gain, such as investing in the stock market?
Answer: Speculative risk. Speculative risks are generally not insurable because they include the possibility of financial gain.
Question 3
What is a 'particular risk,' as opposed to a 'fundamental risk'?
Answer: A particular risk affects only individuals or small groups (e.g., a house fire), whereas a fundamental risk affects large segments of society (e.g., earthquakes or war).
Question 4
Which category of risk refers to risks that remain relatively constant over time, such as fire or theft?
Answer: Static risks. Unlike dynamic risks (which change with economic or social conditions), static risks are tied to natural events or human behavior and are more predictable.
Question 5
List four characteristics that make a risk insurable.
Answer: An insurable risk must be: (1) due to chance, (2) definite and measurable, (3) statistically predictable (large numbers of similar exposure units), and (4) not catastrophic to the insurer.