Texas General Lines — Property and CasualtyGeneral InsuranceEasy
A new insurance agent is explaining the fundamental principles of insurance to a prospective client. The agent emphasizes that for a risk to be insurable, it must meet several criteria. Which of the following is NOT a characteristic of an insurable risk?
- AThe loss must be accidental and unintentional.
- BThe loss must not be financially ruinous to the insurer.
- CThe loss must be definite and measurable.
- DThe loss must be catastrophic for the individual.
Show answer & explanationAnswer & explanation
Correct answer: D. The loss must be catastrophic for the individual.
While insurance is designed to protect individuals from catastrophic losses, the characteristic of an insurable risk is that the *overall* loss must not be catastrophic to the *insurer*. An individual loss being catastrophic to the individual is precisely why insurance is needed, but it's not a characteristic of the risk itself being 'insurable' from the insurer's perspective.
Why the other options are wrong
- A. This is a key characteristic; insurance covers unforeseen and unintended events.
- B. This is a key characteristic; the insurer must be able to absorb the losses without becoming insolvent, often achieved through diversification and reinsurance.
- C. This is a key characteristic; the loss must be quantifiable in terms of time, place, cause, and amount.
Characteristics of Insurable Risk
Criteria that a risk must meet to be considered suitable for insurance coverage by an insurer.
- Loss must be definite and measurable.
- Loss must be accidental and unintentional.
- Loss exposure must be large enough to be statistically predictable.
- Loss must not be catastrophic to the insurer.
- Premiums must be affordable.
- There must be a large number of similar exposure units.
Memory trick: For a risk to be 'IN', it needs to fit these 'IN'surance criteria.