Other Than Life (OTL) Practice Exam

What does insurable interest refer to?

1. The interest an insurance company earns on its investments

2. The monetary interest a person might have in the happening of a loss

3. The interest an underwriter has in writing a profitable line of business

4. The interest a life insurance company pays on certain types of life policies

The correct answer is: The monetary interest a person might have in the happening of a loss

Insurable interest refers to the monetary interest a person has in the occurrence of a loss. This concept is fundamental in insurance contracts, as it establishes the legitimate interest of the insured in protecting the asset or individual being insured. For example, an individual has an insurable interest in their own life, as well as in the lives of family members, and in property that they own. This means that the person would suffer a financial loss should the insured event occur, which is essential for the validity of an insurance policy. The principle of insurable interest is crucial because it prevents moral hazard and potential fraud. If a person did not have a genuine financial stake in the object of the insurance, they might be incentivized to cause a loss intentionally. Thus, insurable interest helps ensure that insurance is carried out for valid reasons of protection rather than speculative gain. This understanding underlies the necessity for establishing insurable interest at the inception of an insurance policy to make the contract legally enforceable.