Which of the following best describes insurable risk?

• A. Probabilistic, measurable, and financially feasible.
• B. Purely speculative.
• C. Certain to occur.
• D. Too unpredictable to quantify.

Answer: (A)

Insurable risk is characterized by being probabilistic, measurable, and financially feasible to insure. This means there is real uncertainty about whether a loss will occur, but the likelihood and potential loss can be estimated using statistics. The potential loss must be measurable in dollars (or another unit of value) so the insurer can quantify expected losses and set a premium. And the risk must be financially feasible to insure, meaning the premium can cover expected losses, expenses, and a profit, typically by pooling many similar exposures so the law of large numbers smooths the variability.

If a risk is purely speculative, it resembles gambling and isn’t insurable. If it’s certain to occur, there’s no true risk to transfer. If it’s too unpredictable to quantify, the insurer can’t price it reliably.