Property and Casualty Insurance Practice Exam

Which type of risks can insurance not protect against?

1. Pure Risks

2. Speculative Risks

3. Both Pure and Speculative Risks

4. Insurable Risks

The correct answer is: Speculative Risks

Insurance primarily covers pure risks, which are situations that involve the possibility of loss or no loss, but not gain. These include risks like fire, theft, and natural disasters. Pure risks are insurable because they present a predictable likelihood of loss, allowing insurers to establish premiums and provide adequate coverage. On the other hand, speculative risks involve the possibility of gaining or losing something, such as investing in stocks or starting a new business venture. These risks are inherently uncertain and do not fall within the realm of traditional insurance. Insurance is designed to protect against losses that can be quantified and managed; therefore, speculative risks are typically not insurable because they involve voluntary choices where individuals accept the potential for both loss and gain. Thus, the correct answer identifies speculative risks as those that insurance cannot protect against, as they fundamentally differ in nature from the types of risks that insurance aims to cover.