Question

Which of the following is considered to be any situation that has the potential for loss?

- A) Speculative risk
- B) Pure risk
- C) Hazardous risk
- D) Moral risk

Answer 1

Pure risk is the situation that has potential for loss, while moral hazard refers to riskier behavior due to the presence of insurance.

Step-by-step explanation:

The correct answer to this student's question is (B) Pure risk. A pure risk refers to situations where there is a possibility of loss or no loss, but no chance of gain. For example, if your house could be damaged in a storm, that is a pure risk. In contrast, a speculative risk involves a chance to either gain or lose, like investing in the stock market. A hazardous risk usually involves a dangerous situation that increases the probability of a loss, and moral risk describes the increase in the frequency or severity of loss due to a person's behaviors, especially when one's actions change after obtaining insurance. The concept of moral hazard is notably associated with insurance, where coverage might lead to riskier behavior because the potential cost of loss is mitigated.