What does the "insurable interest" requirement ensure?

The "insurable interest" requirement is a fundamental principle in insurance that ensures the insured possesses a legitimate interest in the subject matter of the insurance policy. This means that the policyholder must have a stake in the item being insured, such as ownership, a legal obligation, or a financial interest. The purpose of this requirement is to prevent insurance from becoming a speculative investment and to reduce moral hazard, which could arise if individuals were able to insure things they don't own or care about.

For instance, someone cannot take out a life insurance policy on an unrelated person without their consent, as it creates potential for abuse. By requiring insurable interest, insurance companies can promote ethical buying and prevent fraud, maintaining the integrity of the insurance system.

The incorrect options do not accurately reflect the purpose of the insurable interest requirement. Lowering premiums does not relate directly to having an insurable interest, nor does it guarantee prompt claim payments or protection against coverage cancellation. These outcomes pertain to different aspects of insurance practices and customer service, rather than the foundational concept of insurable interest.