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

Which of the following is a standard feature that makes a risk insurable in the classic sense?

A risk is insurable when the loss is accidental from the insured's viewpoint and can be measured in money terms. Certain losses, perfectly correlated losses or contracts without insurable interest cannot be insured sensibly, because pooling and indemnity would not work.

  1. AThe insured event must be certain to occur within the policy term
  2. BThe insurer must be able to control the timing of each loss
  3. CThe loss must be accidental from the insured's viewpoint and financially measurableCorrect
  4. DThe loss must be perfectly correlated across all policyholders
  5. The insured must have no interest in the subject matter

Explanation

Insurable risks involve fortuitous, measurable losses where the insured has an insurable interest. Certainty of loss (A) means no risk. Perfect correlation (D) prevents pooling, and no interest (E) would make the contract a wager.

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