Why is insurable interest significant in life and health insurance?

Insurable interest is a fundamental concept in life and health insurance that serves primarily to prevent fraud and establish a valid insurance contract. This principle requires that the policyholder have a vested interest in the continued life and health of the insured individual. In practical terms, this means that the policyholder must stand to suffer financially or emotionally from the insured person's death or sickness.

When insurable interest is present, it helps to ensure that insurance contracts are legitimate and not merely speculative bets on the lives of others. This reduces the risk of moral hazard, where individuals might have an incentive to cause harm or otherwise manipulate circumstances to benefit from the policy. By mandating that a policyholder can demonstrate a legitimate connection to the insured person, the insurance industry protects itself from fraud and maintains the integrity of the insurance system.

The other options do not accurately represent the core significance of insurable interest. While profitability and premium variations may occur in insurance markets, they are not directly tied to the concept of insurable interest itself. Furthermore, insurable interest does not inherently simplify the application process; rather, it adds a necessary layer of evaluation to the underwriting process to ensure the validity of the coverage being sought.