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Difficulty: EasyElements of Insurable Risk

For an insurance company to accept and cover a risk, the exposure must meet specific criteria to be considered ideally insurable. Which of the following characteristics are required elements of an insurable risk? Select all that apply.

  1. The loss must be accidental and due to chance.Answer
  2. The premium required to cover the risk must be economically feasible.Answer
  3. C
    The exposure must involve a speculative risk, offering a chance for financial gain.
  4. D
    The risk must be completely eliminated through risk avoidance prior to issuing a policy.

Answer

The characteristics required for an ideally insurable risk include that the loss must be accidental and due to chance, and the premium must be economically feasible.
For a risk to be insurable, it must meet several criteria, including that the loss is accidental, definite, measurable, statistically predictable, not catastrophic, and that the premium is economically feasible. Therefore, the requirements for an accidental loss and economically feasible premium are correct elements.

Step-by-Step Solution

1
Review each option against the fundamental elements of an insurable risk.
Identified that accidental losses and economically feasible premiums are core requirements.
Insurers require losses to be accidental to prevent moral hazard, and premiums must be affordable so that consumers can actually purchase the policy.
2
Evaluate the remaining options for incorrect risk concepts.
Identified that speculative risks and risk avoidance do not align with the criteria for purchasing insurance.
Insurance only covers pure risks (chance of loss only), and buying insurance is a form of risk transfer, not avoidance.

Key Concept

Elements of Insurable Risk
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Elements of Insurable Risk

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