Future Business Leaders of America (FBLA) Marketing Practice Test

What characteristic must a risk have to be considered an insurable risk?

1. It must be unpredictable

2. It must be faced by a small number of people

3. It must be faced by a large number of people

4. It must be rare

The correct answer is: It must be faced by a large number of people

For a risk to be considered insurable, it must be faced by a large number of people. This characteristic is crucial because insurance operates on the principle of risk pooling. By spreading the risk across a broad base of individuals or entities, insurers can collect premiums from many policyholders, which in turn allows them to pay for the claims made by the smaller number of policyholders who actually experience a loss. This distribution of risk is necessary to ensure that the insurer can remain financially stable while providing coverage. If a risk is only faced by a small group, it becomes more challenging for an insurer to predict the likelihood of losses and to effectively manage the costs associated with those losses. Consequently, such risks may either be too risky for insurance companies to underwrite or might lead to disproportionately high premiums that would make insurance untenable for most people involved. Unpredictability might apply to many risks, but it is not a definitive factor for insurability. Similarly, rarity can limit the pool of people facing similar risks, which can complicate insurance arrangements. Therefore, the characteristic that makes a risk insurable is the ability for many individuals to face the same exposure, allowing for the establishment of a sustainable and fair insurance model.