CII London Market (LM2) – Insurance Principles and Practices Practice Test 2026 - Free Insurance Exam Practice Questions and Study Guide

To prevent gambling on losses in insurance, insurable interest is essential. This principle mandates that the policyholder must have a legitimate interest in the subject matter of the insurance. Insurable interest ensures that the insured stands to suffer a financial loss or detriment if the insured event occurs, which aligns the policyholder’s interests with the purpose of insurance. By requiring that the insured has something to lose, insurable interest helps to eliminate moral hazard and prevents the insurance contract from becoming a speculative wager on potential losses. This foundation is crucial for maintaining the integrity of the insurance system, as it promotes responsible purchasing of insurance to safeguard against genuine risks rather than to profit from unfortunate events.