Question

Mike says, "The possibility that my house may burn isa pure risk for me, but if I buy insurance, it is a speculativerisk for the insurance company." Do you agree? Why or

Answer 1

Answer:

I agree with Mike because pure risks involve only possible losses. Since he owns his house, the possibility of it burning down would represent only a loss to him.

But if he buys insurance, he will pay an insurance premium which means that if the house burns down, the company will lose money, but if the hose doesn't burn down, the insurance company will make a profit. This represents speculative risk because the possibility of a gain and a loss exist.