The principle of insurable interest means a person can only insure something if they would suffer a real financial loss if it is damaged or lost.
This helps prevent moral hazard because people will not take insurance just to make money or cause loss on purpose. It makes sure insurance is used for protection, not profit.
It is important for the insurance industry because it:
- Stops people from gambling with insurance.
- Makes insurance contracts legal and fair.
- Builds trust between insurers and policyholders.
- Keeps the insurance system honest and stable.