South Dakota Crop Insurance Practice Exam

In crop insurance terms, what is considered a 'pure risk'?

1. A risk with potential for profit

2. A chance of loss with no gain

3. A manageable financial risk

4. A calculated market risk

The correct answer is: A chance of loss with no gain

In the context of crop insurance, a 'pure risk' refers to a situation where there is only the possibility of loss and no opportunity for profit. This concept is fundamental to understanding risk management in insurance, as it highlights scenarios that can result only in negative outcomes, such as natural disasters affecting crop yields. In this framework, pure risks are contrasted with speculative risks, which involve the potential for both gain and loss. Since crop insurance primarily addresses uncertainties like adverse weather conditions, pests, or diseases—where the primary concern is to mitigate losses rather than seek profit—defining pure risk as a chance of loss without any gain is essential. This understanding helps in determining insurance coverage, premiums, and the indemnity process, ensuring that farmers can protect their investments against uncontrollable events.