Final answer:
Insurance manages pure risks rather than speculative risks, working on the principle of sharing risk among many individuals. Imperfect information is inherent in the insurance process, with premiums and payouts designed to balance out in an actuarially fair system. Moral hazard is a potential issue where insured individuals might not take precautions to avoid risks.
Step-by-step explanation:
The statement that insurance does not deal with speculative risk is True. Insurance is designed to manage pure risks, which are risks that only involve a chance of loss with no opportunity for gain. Speculative risks, on the other hand, involve a chance of loss or gain and are not typically insurable.
Insurance works because it incorporates imperfect information regarding the likelihood of future events. Companies use statistical models to estimate the risk of an event happening to individuals within a certain group, but they cannot predict specific outcomes with perfect accuracy. Given this uncertainty, individuals pay premiums to an insurance company which then provides compensation in the case of an adverse event like a car accident, illness, or theft.
The principles of insurance also imply that there must be some balance over time between the premiums paid and the benefits received by the insured. When an insurance policy is actuarially fair, premiums should correspond to the expected payouts for the insured group. Issues like moral hazard can arise when people change their behavior because they are insured, potentially increasing the likelihood or cost of the risks insured against.