Texas Property and Casualty License Practice Exam

Which of the following statements about pure risk is accurate?

1. It always results in a gain

2. It involves the possibility of both losses and gains

3. It is covered by insurance

4. It does not exist in financial settings

The correct answer is: It is covered by insurance

Pure risk refers to a situation where there are only two possible outcomes: loss or no loss. Unlike speculative risks, which can result in a gain or a loss, pure risk is limited solely to the potential for loss. Therefore, it is classified this way because it does not involve the possibility of profit or gain. Insurance serves as a mechanism to address pure risks by providing financial protection against potential losses. Thus, when considering pure risks, it is accurate to state that they are indeed covered by insurance. This coverage allows policyholders to transfer the financial consequences of loss to the insurer, thereby managing their risk exposure. In the context of the other statements: - Stating that pure risk "always results in a gain" misrepresents its nature, as pure risk is inherently about avoiding losses. - The assertion that pure risk "involves the possibility of both losses and gains" mischaracterizes it, as gains are not a possibility with pure risk. - The statement that pure risk "does not exist in financial settings" is false; in fact, pure risk is very prominent in financial contexts, particularly in insurance. Understanding these distinctions is vital for grasping the broader concepts of risk management and insurance.