Why is having an insurable interest important for an individual wanting to insure an object or person?

Having an insurable interest is crucial because it establishes the policyholder's legitimate stake in the risk they are insuring. This requirement helps to prevent moral hazards—situations where the insured may intentionally cause a loss to benefit from the insurance payout. By ensuring that only individuals with a genuine interest in the preservation of the insured object or person can take out insurance, the insurance industry helps to maintain ethical standards and trust in the system.

When someone holds an insurable interest in an object or a person, they are motivated to protect that interest, reducing the likelihood of fraudulent claims or intentional damage. For example, a homeowner has an insurable interest in their house, which encourages them to take proper care of it rather than neglect it or harm it for financial gain. This foundation of insurable interest is vital to the functioning of insurance as a whole, ensuring that insurance serves its purpose of protection rather than becoming a tool for exploitation.