What is meant by insurable interest?

Insurable interest refers to a financial interest that an individual or entity has in the subject of the insurance policy. This concept is foundational in insurance practices because it ensures that the policyholder stands to lose financially if the insured event occurs. For instance, you have an insurable interest in your home because if it were damaged or destroyed, you would suffer a financial loss.

This principle helps to prevent moral hazard and ensures that individuals do not take out insurance on items or assets in which they have no personal stake, since it could incentivize them to cause a loss intentionally to collect insurance money.

The other choices do not accurately represent the concept of insurable interest. Premium discounts relate to pricing strategies, limits on claims pertain to the maximum amount an insurer will pay under a policy, and policyholder rights to modify policies do not directly relate to the fundamental principle of insurable interest itself.