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IAI Actuarial Core Principles · Economic Modelling · Role of insurance in reducing or removing risk

Which of the following is a necessary condition for a risk to be transferable to an insurer under the usual principles of insurability?

The loss must be definable and fortuitous from the insured's viewpoint, and the insured must have an insurable interest. Certain events are uninsurable, insurers only reduce relative variability through pooling rather than eliminating it, and premiums are based on expected loss, not the maximum possible loss.

  1. AThe insured must be risk seeking
  2. BThe loss event must be certain to occur within the policy term
  3. CThe loss must be definable and fortuitous from the insured's viewpoint, with an insurable interestCorrect
  4. DThe insurer must be able to eliminate all variability in its own claims
  5. The premium must exceed the maximum possible loss

Explanation

Insurable risks need a loss that is clearly definable, accidental (fortuitous) and subject to insurable interest. Certain losses cannot be insured, insurers do not eliminate variability but pool it, and premiums are far below maximum loss. Risk seeking is not required.

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