South Carolina Life Insurance Practice Exam

Which of the following is NOT a characteristic of an ideally insurable risk?

1. Must be statistically predictable

2. Must be catastrophic

3. Must be definite and measurable

4. Must not be mandatory

The correct answer is: Must be catastrophic

In the context of insurable risks, an ideally insurable risk must possess specific characteristics to ensure that it can be effectively managed by an insurance company. The key characteristic in question, which is the idea that a risk must not be catastrophic, is indeed accurate. For a risk to be insurable, it should ideally not lead to widespread losses that could threaten the insurer's financial stability. Catastrophic events can lead to large-scale claims that the insurer may struggle to cover, making such risks less desirable for insurance purposes. On the other hand, risks that are statistically predictable allow insurers to use historical data to assess likelihood and set premiums accordingly, while definite and measurable risks help in determining precise coverage amounts and terms. Additionally, risks that are not mandatory provide individuals with the choice to insure, making it a voluntary process. These characteristics together ensure that the insurance mechanism functions smoothly, providing coverage that is fair and sustainable for both the insurer and the insured. Thus, stating that a risk must be catastrophic does not align with the principles of ideally insurable risks, as it directly contradicts the need for predictability and manageability in insurance.