What does insurable interest refer to?

Insurable interest is a fundamental principle in insurance that refers to having a financial stake in the subject matter of the insurance policy. This means that the individual or entity seeking insurance must be financially affected by the loss or damage to the property or person insured. It is essential to establish this interest to prevent moral hazard, which occurs when a person may act recklessly if they do not suffer financially from a loss.

Option B accurately captures this notion by stating that it involves a financial interest in life or property that may result in a loss. For example, a homeowner has an insurable interest in their house because they would suffer a financial loss if it were destroyed. Similarly, a parent has an insurable interest in the life of their child because their death would result in emotional and potentially financial hardship.

Understanding insurable interest is crucial for both the insurer and the insured, as it ensures that insurance is used for legitimate risk management purposes and helps maintain the integrity of the insurance system.