What does adhering to the principle of insurable interest protect against?

The principle of insurable interest is a foundational concept in insurance that ensures an individual has a legitimate stake in the property or life being insured. This principle protects against an individual being more likely to purposefully cause a loss.

When an insured party has insurable interest, they stand to suffer a financial loss should the insured event occur, which creates a natural disincentive for that party to engage in fraudulent activities or to cause harm deliberately. For instance, if someone stands to gain financially from a loss occurring—such as through insurance payouts—they might be motivated to create that loss intentionally. By requiring insurable interest, the insurance system promotes honesty and helps maintain the integrity of insurance contracts.

The rationale is to align the interests of the insured with the insurance purpose; thus, it prevents moral hazard, which refers to increased risk when an individual does not bear the full consequences of their actions. Therefore, adherence to the principle of insurable interest plays a crucial role in the overall stability and reliability of insurance institutions.