South Dakota Crop Insurance Practice Exam

Which of the following is NOT an element of insurable risks?

1. Large numbers of homogenous units

2. Loss must be fortuitous or accidental

3. Loss must always be catastrophic

4. Loss must be definite

The correct answer is: Loss must always be catastrophic

An insurable risk is characterized by several specific elements that make it suitable for insurance coverage. One of these key elements is that the loss must not be catastrophic. This means that while some risk may involve significant losses, for insurance to effectively function, it must address events that can occur with a degree of randomness and that are not too extreme. Large numbers of homogeneous units refer to the idea that the risks being insured should be similar enough to allow for accurate calculations of risk and premiums over a large number of similar insured units. A loss being fortuitous or accidental indicates that it should happen by chance, not resulting from a deliberate action; this is essential for risk pooling and fair distribution of loss among insured parties. Lastly, the loss must be definite, meaning that it should be measurable in terms of timeframe, magnitude, and nature. Given these definitions, stating that "loss must always be catastrophic" contradicts the principles of insurable risks, making it the correct choice for what is NOT an element of insurable risks.