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Difficulty: EasyElements of Insurable Risk

An insurance company is evaluating a proposal to provide coverage against widespread nuclear war. The underwriters determine that this risk is uninsurable because a single event would simultaneously cause massive financial losses to an enormous number of people, potentially bankrupting the insurer. Which element of an ideally insurable risk does this exposure violate?

  1. The loss must not be catastrophic.Answer
  2. B
    The exposure must be a pure risk rather than a speculative risk.
  3. C
    The risk must be handled through risk retention instead of risk transfer.
  4. D
    The loss must be caused by a defined hazard rather than a peril.

Answer

The exposure violates the requirement that the loss must not be catastrophic.
For a risk to be privately insurable, it must not be catastrophic to the insurer. The insurer must be able to spread the risk among many policyholders without the threat that a single event will trigger massive claims from all of them at once. Widespread war violates this rule.

Step-by-Step Solution

1
Analyze the scenario provided in the stem.
The scenario describes a single event (nuclear war) causing massive financial losses simultaneously.
Identifying the core issue helps in determining which insurable risk rule is being broken.
2
Evaluate the core elements of an insurable risk against the scenario.
The scenario directly conflicts with the principle that an insurer must avoid catastrophic losses that could result in insolvency.
An ideally insurable risk must be non-catastrophic to allow the law of large numbers to operate effectively.

Key Concept

Elements of Insurable Risk
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Topics

Elements of Insurable Risk

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