South Carolina Personal Lines Practice Exam

What is a characteristic of a risk that is insurable?

1. It must be catastrophic

2. It must be predictable

3. It must involve a high degree of chance

4. It must impact a small number of individuals

The correct answer is: It must be predictable

A risk that is insurable must be predictable, meaning that it can be estimated in terms of potential loss and frequency. Insurers rely on statistical data and historical information to assess risks for underwriting and pricing purposes. This ability to predict the occurrence of certain events allows insurers to create policies that provide financial protection when losses occur. Predictability ensures that a risk can be effectively managed by the insurance company, allowing them to set appropriate premiums and create reserves to cover potential claims. For an insurable risk, the likelihood of the event happening must be statistically measurable to allow insurers to offer coverage that is both financially viable and beneficial to policyholders. In contrast, risks that are catastrophic may be less predictable, and those that involve a high degree of chance might lead to uncertain outcomes that cannot be adequately assessed. Additionally, a risk impacting a small number of individuals may not provide the insurance company with a sufficient pool of premiums to cover potential claims, making it less attractive for insurance. Hence, the key characteristic that supports insurability is the ability to predict the likelihood and financial impact of risks.