What is the concept of "insurable interest"?

The concept of "insurable interest" refers to the requirement that the insured must stand to suffer a financial loss or hardship from the occurrence of the risk insured against. This principle serves as a foundational element in insurance contracts, ensuring that the insured has a legitimate interest in the preservation of the subject matter of the insurance. For example, if a policyholder has an insurable interest in a property, they would be adversely affected financially if that property were to be damaged or destroyed. This requirement helps prevent moral hazard, where individuals might otherwise be incentivized to cause loss or damage to benefit from an insurance claim.

The other options do not accurately reflect the concept of insurable interest. For instance, the obligation to pay premiums is a responsibility of the insured but does not pertain to the need for an insurable interest. Similarly, while the insurer’s interest in profitability is related to the overall functioning of the insurance industry, it does not directly relate to the insured's personal stake or interest in the insured object. Lastly, the right of the insured to choose coverage limits is part of customizing an insurance policy but does not include the necessity of having an insurable interest.