Which of the following best explains why not all losses are insurable in economics?

• A. All losses can be insured as long as the premium is paid.
• B. Losses caused by natural disasters are always insurable.
• C. Insurers are required by law to cover every possible loss.
• D. Some losses are unpredictable or result from moral hazard, making them difficult for insurers to cover profitably.

Answer: (D)

Verified step by step guidance

1. Understand the concept of insurability: In economics and insurance theory, a loss is insurable if it meets certain criteria such as being measurable, predictable, and not caused by the insured's intentional actions.
2. Recognize that not all losses are insurable because some are unpredictable or involve moral hazard. Moral hazard occurs when the behavior of the insured changes because they have insurance, increasing the likelihood or size of a loss.
3. Identify that losses caused by natural disasters can sometimes be insurable, but they may also be difficult to insure if they are highly unpredictable or catastrophic, leading to large correlated losses that insurers cannot easily cover.
4. Note that insurers are not legally required to cover every possible loss; they select risks based on insurability criteria to maintain profitability and sustainability.
5. Conclude that the best explanation for why not all losses are insurable is that some losses are unpredictable or result from moral hazard, making them difficult for insurers to cover profitably.