Massachusetts State Life Insurance Practice Exam

In the context of insurance, 'risk' is best defined as the potential for loss. This definition encompasses the fundamental role of insurance, which is to provide protection against unforeseen events that could lead to financial loss. Insurance companies assess various types of risks—such as health risks, property risks, and liability risks—so they can determine how to manage and cover these potential losses through premium pricing and policy structures.

The other options do not accurately capture the essence of risk in insurance. The idea of guaranteed success implies certainty and a positive outcome, which is contrary to the unpredictable nature of risk. A controlled situation with no uncertainty describes stability rather than potential loss, and the notion of earning a profit does not align with the concept of risk, which often involves facing potential negative outcomes. Thus, understanding risk as the potential for loss is crucial for grasping how insurance operates and contributes to financial security.