Casualty Actuarial Society (CAS) Practice Exam

Can a developer purchase insurance for a building under construction against fire and accidental loss?

1. No, because it is considered speculative risk

2. Yes, because they represent pure risk

3. No, because it is too high of a risk

4. Yes, but only for theft

The correct answer is: Yes, because they represent pure risk

A developer can indeed purchase insurance for a building under construction against fire and accidental loss because these types of risks are classified as pure risks. Pure risks are situations that can result in a loss or no loss, without the possibility of gain. Examples include fire damage, weather-related events, and accidents that can occur during the construction phase. When it comes to insurance, pure risks are insurable because insurers can pool these risks and manage potential losses effectively. The risks associated with a building under construction are not speculative, as speculative risks involve the potential for both loss and gain, such as investing in stocks. Instead, the fire and accidental loss risks are straightforward in terms of financial outcomes. Thus, purchasing insurance for such risks aligns with standard insurance practices and represents a prudent step for a developer to mitigate potential financial losses during construction. This understanding is essential for managing construction projects and financial planning, as it helps safeguard investments from unforeseen events that could lead to significant losses.