South Carolina Life Insurance Practice Exam

What are the five characteristics that define an ideally insurable risk?

1. Must be the same for all insured individuals

2. Must involve a high potential for gain

3. Must be highly unpredictable

4. Must be definite and measurable, due to chance, and not catastrophic

The correct answer is: Must be definite and measurable, due to chance, and not catastrophic

An ideally insurable risk is characterized by several specific attributes that make it suitable for insurance coverage. The correct choice highlights that the risk must be definite and measurable, associated with the element of chance, and not catastrophic. Definite and measurable means that the risk must be clearly defined in terms of the potential loss amount and the circumstances surrounding it. This allows insurance companies to calculate premiums effectively based on statistical data and assess the likelihood of claims being made. The inclusion of chance indicates that the event should not be guaranteed to occur but rather have an uncertain outcome. This unpredictability is essential in insurance, as it enables the pooling of risk: many individuals pay premiums, but only a few will experience a loss. Lastly, not being catastrophic implies that the risk should not threaten the insurance company's viability or lead to excessive claims in a short period. Catastrophic risks can overwhelm an insurer's resources, making these types of risks less insurable. In summary, the defining characteristics allow insurers to manage their risk effectively, ensuring that they can cover claims while still maintaining a profitable business model.