Insurable interest

Insurable interest is a condition of validity of the insurance contract, enshrined in many national legislations, according to which the policyholder must have an economic or patrimonial interest in the preservation of the property or situation covered by the policy. Without this interest, the contract is not insurance but a wager or speculation on the occurrence of an event, which would render it null or contrary to public policy in most legal systems. Insurable interest may take several forms: ownership of an asset, a claim against a debtor, a contractual relationship whose breach would cause harm, or the life and physical integrity of a person in life and health insurance. Its existence is generally assessed at the time the policy is taken out and at the time of the loss. In the context of parametric insurance, this concept is put to the test, because the parametric product pays a fixed amount upon the occurrence of an index, regardless of any actual loss suffered by the policyholder. A farmer who has suffered no loss despite the triggering of the index will receive an indemnity, while conversely a policyholder who has lost everything without the index reaching its threshold will receive nothing. This decoupling calls into question the relevance of insurable interest as a condition, and explains why some parametric products fall under derogatory regulatory frameworks or are structured as derivative financial instruments.

An airline underwrites a parametric weather product indexed on wind speed at the airports in its operating area. When the wind exceeds 80 km/h for more than six hours at a covered airport, a payment of 500,000 euros is automatically triggered. The airline may not have suffered any actual loss that day if its flights were not scheduled at that airport. A regulator could then challenge the existence of an insurable interest contemporaneous with the trigger, requiring the airline to demonstrate a link between its revenues and the measured wind speed, which pushes structurers to introduce a minimum condition of operational linkage.

insurable interest, intérêt à la conservation, intérêt économique assuré