General Insurance PrinciplesQuestion 164 of 474
A homeowner faces the chance that a kitchen fire will destroy the house. Insurers call this a pure risk because:
a.the loss can be predicted exactly for any one household
b.the homeowner could profit from the event if the house is rebuilt
c.the chance of the fire happening is under the owner's control
d.the outcome is either a loss or no loss, with no chance of gain
Explanation
Pure risk presents only two outcomes, loss or no loss, and that is the only kind of risk private insurers will write. The choice describing a possible profit describes speculative risk, such as buying stock or opening a restaurant, which insurance does not cover. No insurer can predict the outcome for one household; the law of large numbers predicts results for the group.
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