PSI Life Exam Practice Test

What is a necessary element of insurable risks?

1. The loss must be significant

2. The loss must be calculable

3. The loss must happen frequently

4. The loss must involve property damage

The correct answer is: The loss must be calculable

The necessity for the loss to be calculable is fundamental to insurable risks because it allows insurers to assess the likelihood and potential financial impact of the risk. When a loss is calculable, it means that the insurer can estimate the expected frequency and severity of the losses, which is crucial for determining premiums and ensuring the sustainability of the insurance pool. Calculability enables the insurer to create a model for setting aside adequate reserves to pay claims while still remaining profitable. If the potential losses are not easily measured or projected, it becomes extremely challenging for insurance companies to operate effectively. This assurance of predictability aids in risk management and allows both parties—the insurer and the insured—to understand the terms of coverage better. In contrast, the other options do not capture this fundamental aspect of insurable risks. While significant losses might attract attention, they do not automatically ensure that the risk can be insured if it is unpredictable. Frequent losses may be insurable but do not address the need for quantification. Lastly, while property damage can be insurable, it is not a necessary condition for all types of insurance risks, such as life or health insurance.