Which statement describes insurable risk requirements?

Which statement describes insurable risk requirements?

• A. Losses must be predictable and definite.
• B. Losses must be due to chance and not catastrophic.
• C. Loss must be predictable, definite, due to chance, cannot be catastrophic, exposure must be large.
• D. Loss must be certain.

Answer: (C)

Insurable risk must have a set of characteristics that let an insurer reasonably predict losses and price coverage. The loss should occur by chance, not because it’s certain to happen. It must be definite and measurable when it occurs, so the insurer can determine the amount of the loss. It must not be so catastrophic that it could wipe out the insurer’s ability to cover many claims at once. And there needs to be a large enough pool of similar exposures so statistics can be used to estimate expected losses and set premiums accordingly. The statement that includes all of these elements—losses that are predictable in aggregate, definite when they occur, due to chance, not catastrophic, and based on a large exposure—best describes insurable risk. Other options omit one or more of these essential factors: they might emphasize predictability or chance alone, but miss the need for definable losses, limits against catastrophic risk, or a sufficiently large pool of insureds. The idea that losses must be certain is contrary to insurance, which is about transferring the risk of uncertain losses.

Insurable risk must have a set of characteristics that let an insurer reasonably predict losses and price coverage. The loss should occur by chance, not because it’s certain to happen. It must be definite and measurable when it occurs, so the insurer can determine the amount of the loss. It must not be so catastrophic that it could wipe out the insurer’s ability to cover many claims at once. And there needs to be a large enough pool of similar exposures so statistics can be used to estimate expected losses and set premiums accordingly.

The statement that includes all of these elements—losses that are predictable in aggregate, definite when they occur, due to chance, not catastrophic, and based on a large exposure—best describes insurable risk. Other options omit one or more of these essential factors: they might emphasize predictability or chance alone, but miss the need for definable losses, limits against catastrophic risk, or a sufficiently large pool of insureds. The idea that losses must be certain is contrary to insurance, which is about transferring the risk of uncertain losses.