Alabama Insurance Adjuster Practice Exam

What type of risk does an insurance company typically want to insure?

1. Pure risk

2. Speculative risk

3. High risk

4. Financial risk

The correct answer is: Pure risk

An insurance company typically seeks to insure pure risks, which are risks that result in only a potential for loss or no loss, but do not have the possibility of financial gain. This type of risk is straightforward and predictable, making it suitable for insurance because it allows for the pooling of risk. Pure risks generally involve events such as fire, theft, or natural disasters, where losses can be quantified and covered. In contrast, speculative risks involve situations where there is a chance of both gain and loss, such as investments in the stock market or gambling, which insurance is not designed to cover. High risk doesn’t specifically define a type of risk in insurance terms and may refer to either pure or speculative risks without clarity. Financial risk typically deals with market variables affecting companies rather than individual losses, which falls outside the typical coverage of insurance policies. Therefore, pure risk is the ideal type of risk that aligns perfectly with the principles of insurability in the insurance industry.