Which statement is correct about insurable loss exposures?

Which statement is correct about insurable loss exposures?

• A. If a loss is fortuitous, the chance of loss could increase as soon as a policy is issued.
• B. If the insured has control over whether or when a loss will occur, the risk is attractive to insure.
• C. Private insurance is suitable for risks where the probability and timing of loss is known.
• D. If losses are not fortuitous, premiums could increase for all policyholders.

Answer: (D)

Insurable loss exposures rely on the element of fortuity—the loss must be accidental and unpredictable to the insured. If losses are not fortuitous (they’re predictable or within the insured’s control), the risk isn’t a good candidate for insurance because the fundamental idea of risk pooling breaks down. In such cases, it’s common for premiums to rise across the entire policyholder base to reflect the higher or more certain expected losses, since the insurer cannot rely on random, uncertain claims to spread cost. The other statements conflict with how insurance pricing and risk transfer work: a policy should not make losses more likely by its mere existence, liability should not depend on the insured controlling the loss (that would be moral hazard), and insurance is designed for uncertain timing and probability, not for risks where those factors are known with certainty.

Insurable loss exposures rely on the element of fortuity—the loss must be accidental and unpredictable to the insured. If losses are not fortuitous (they’re predictable or within the insured’s control), the risk isn’t a good candidate for insurance because the fundamental idea of risk pooling breaks down. In such cases, it’s common for premiums to rise across the entire policyholder base to reflect the higher or more certain expected losses, since the insurer cannot rely on random, uncertain claims to spread cost. The other statements conflict with how insurance pricing and risk transfer work: a policy should not make losses more likely by its mere existence, liability should not depend on the insured controlling the loss (that would be moral hazard), and insurance is designed for uncertain timing and probability, not for risks where those factors are known with certainty.