South Dakota Crop Insurance Practice Exam

Which type of risk involves only the possibility of loss or no loss?

1. Speculative risk

2. Managed risk

3. Pure risk

4. Commercial risk

The correct answer is: Pure risk

Pure risk is the type of risk that involves only the possibility of loss or no loss. It does not include the possibility of gaining something as a result of the risk. This makes pure risk fundamentally different from speculative risk, which encompasses potential gains as well as potential losses. Pure risks are typically insurable events, such as damage to property, natural disasters, or health issues, where the outcomes are either negative (loss) or neutral (no loss). In the context of crop insurance, pure risk is prevalent because farmers face uncertainties such as droughts, floods, or pest infestations that can lead to loss, without any chance of profit arising from those risks. Managed risk involves strategies to control or mitigate risks, while commercial risk refers to risks associated with business operations that include both potential losses and gains.