Property and Casualty Insurance Practice Exam

Which of the following is NOT an element of insurable risk?

1. Must be calculable

2. Must create a financial hardship

3. Must be unexpected

4. Must be predictable

The correct answer is: Must be predictable

An insurable risk is characterized by specific features that make it appropriate for insurance coverage. One critical element is that the risk must be calculable. This means that an insurer must be able to assess the likelihood of the risk occurring and the potential financial loss associated with it. This capability allows for the establishment of appropriate premiums. Another fundamental aspect of an insurable risk is that it should create a financial hardship when it occurs, which underscores the need for insurance. If a loss does not have a financial impact, it may not necessitate the purchase of insurance. Furthermore, the risk must be unexpected to ensure it falls outside the realm of control for the insured party. This unexpected nature of the risk means that the policyholder cannot foresee it happening, thereby reinforcing the role of insurance in protecting against unforeseen events. Predictability is not typically a requirement for insurable risks in the same way the others are. While insurers seek to use statistics and historical data to predict risks, not every insurable risk needs to be predictable. Insurances cover both predictable risks (such as car accidents statistically occurring among drivers) and less predictable risks (like natural disasters). Hence, the assertion that insurable risk must be predictable does not align with the foundational principles of insurable risk assessment