Insurance Broker Certification Practice Exam

What characterizes "speculative risk"?

1. It can only lead to losses

2. It involves both the chance of gain and loss

3. It is insurable under most policies

4. It is primarily related to health insurance

The correct answer is: It involves both the chance of gain and loss

Speculative risk is characterized by the possibility of both gain and loss, making it distinct from other types of risk. In scenarios involving speculative risk, individuals or businesses engage in activities where the outcome can be favorable or unfavorable. For example, investing in stocks is a common form of speculative risk, as there is potential for both profit (gain) if the stock price rises and for loss if the stock price falls. This is in contrast to more traditional risks, such as pure risks, which only have the potential for loss with no opportunity for gain. Since speculative risks can lead to both potential positive and negative outcomes, they are often associated with investment decisions and entrepreneurial ventures rather than insurance. Generally, insurance primarily covers pure risks, which are predictable and insurable, rather than speculative risks. Speculative risks are usually associated with situations such as gambling or stock market investments, where the outcome is uncertain, further emphasizing the element of chance inherent in both opportunities for gain and potential for loss.