What does 'insurable interest' mean?

Insurable interest refers to the financial interest one has in an insurance policy, meaning that the policyholder would suffer a financial loss if the insured event occurs. This legal and financial principle is fundamental in insurance, as it ensures that individuals or entities only buy insurance for properties or lives in which they have a legitimate stake.

For example, a farmer has insurable interest in their crops because the loss of those crops directly affects their financial wellbeing. Without insurable interest, insurance contracts would potentially be exploited for profit without an actual financial risk, which is why insurers require proof of insurable interest when a policy is issued.

This concept underpins the idea that insurance is designed to protect against genuine losses rather than act as a financial gamble. Other options focus on different aspects of insurance but do not capture the essence of insurable interest as a necessary prerequisite for any valid insurance contract.