Study 1 Narrative Practice Questions

Question 1

Contrast pure risk and speculative risk and provide one example for each. (5 marks)

Answer 1

Pure risk and speculative risk:

• Speculative risk exists where there is either a chance of loss or a chance of profit
  Example of speculative risk: Playing a casino game where there is a chance to win or lose
• Pure risk exists where there is a chance of loss and
  no chance of profit
  Example of pure risk: A cooking fire that causes significant damage to a home’s kitchen

(5 marks)

Question 2

Explain the difference between a peril and a hazard, including how insurance responds. (5 marks)

Answer 2

Difference between peril and hazard:

• A peril is an event that may cause a loss
• Insurance is provided against loss arising from the occurrence of an insured peril
• A hazard is a condition that may cause a peril to occur or make the loss more severe
• Hazards may be divided into two major divisions: physical hazard and moral hazard
  (5 marks)

Question 3

Identify five categories of post-loss objectives for risk management. (5 marks)

Answer 3

1. Social responsibility
2. Survival
3. Operational continuity
4. Stable earnings
5. Sustained growth