Which statement regarding insurable risks is not correct

Which statement regarding insurable risks is not correct

 Options:

A. The insurable risk needs to be statistically predictable.
B. An insurable risk must involve a loss that is definite as to cause, time, place and amount.
C. Insureds cannot be randomly selected.
D. Insurance cannot be mandatory.

The Correct Answer Is:

  • C. Insureds cannot be randomly selected

There is a misconception that insureds cannot be randomly selected for insurance risk. In reality, this is not true. Insurance companies can and do use random selection when selecting potential customers for insurance. Random selection ensures that all the possible risks are taken into consideration when issuing policies to customers.

The insurable risk needs to be statistically predictable. A recent article in the Harvard Business Review titled “The Insurable Risk Needs to Be Statistically Predictable” discusses the need for businesses to be able to predict the risk of their actions. The author, Dr. John Goodman, a professor at Yale School of Management, argues that without this understanding companies can’t make informed decisions about how much insurance to buy or whether to go ahead with a project.

Goodman’s research has found that companies that are better able to predict risk are also those that are more successful. He cites examples such as GE Aviation, which was able to rapidly respond to the aviation industry’s shift from propeller planes to jetliners by using predictive models and actuarial science. By being able to predict risks, these companies were better able to allocate resources where they would be most effect.

An insurable risk must involve a loss that is definite as to cause, time, place and amount. Insuring risks is a business that can be profitable for those who understand the insurable risk definition and how to reduce it. There are four key elements of any insurable risk, which are cause, time, place and amount. These must all be definite in order for an insurance company to insure the risk.

If any one of these elements is not definite, then the insurance company will not cover the risk. For example, if an earthquake is predicted for a certain area at a certain time on a certain day but it does not happen on that day or time, the insurance company would not cover the risk because it is not definite as to when or where the earthquake will happen. Insurers also look at other factors when determining whether or not to insure a risk.

Insurance cannot be mandatory. As we enter into a new, uncertain era in which health care and other services are becoming increasingly expensive, mandatory insurance may become more and more appealing. However, mandatory insurance is impracticable and would not work in practice. It is not possible to have a mandatory insurance system that covers everyone in the country, as there would be too many people who could not afford coverage.

Furthermore, it would be difficult to enforce compulsory coverage since people would be able to avoid paying their premiums by going without necessary medical treatment. Even if the government were able to force people to buy insurance, it is likely that the quality of coverage would be poor since private insurers would only want to insure high-risk individuals. In short, while there may be some benefits to implementing a mandatory insurance system, such a scheme is impractical and ultimately unenforceable.

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