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Difficulty: EasyElements of Insurable Risk

Match each uninsurable scenario with the specific element of an ideally insurable risk that it violates.

  • A homeowner intentionally sets fire to their own garage to collect a payout.Loss must be accidental and due to chance
  • A family seeks a policy to cover the purely sentimental value of a lost photograph.Loss must be definite, measurable, and have a clear financial value
  • A student wants to buy a policy to cover the potential loss of a single $2 pencil.Loss must be large enough to cause an economic hardship
  • A company tries to insure its building specifically against the peril of global nuclear war.Loss must not be catastrophic to the insurer

Answer

Intentionally setting a fire violates the 'accidental' requirement. Sentimental value violates the 'definite and measurable' requirement. A $2 pencil violates the 'economic hardship/large loss' requirement. Nuclear war violates the 'non-catastrophic' requirement.
Each scenario directly violates one of the fundamental criteria required for a private insurance company to safely and feasibly accept a transfer of risk.

Step-by-Step Solution

1
Analyze the intentional fire scenario.
Matches with 'accidental and due to chance'.
Insurance is designed for unexpected events, not intentional acts of destruction by the insured.
2
Analyze the sentimental photograph scenario.
Matches with 'definite, measurable, and financial value'.
Insurers must be able to calculate a specific dollar amount for the loss, which is impossible for purely emotional attachments.
3
Analyze the $2 pencil scenario.
Matches with 'economic hardship'.
Insurance is meant to transfer risks that would financially devastate an individual, not trivial expenses.
4
Analyze the nuclear war scenario.
Matches with 'not catastrophic'.
Insurers rely on the Law of Large Numbers, which fails if a single event causes massive, simultaneous losses across the entire risk pool.

Key Concept

Elements of Insurable Risk
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Topics

Elements of Insurable Risk

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