What does the term 'insurable interest' refer to?

The term 'insurable interest' refers to having a financial stake in the insured item or person. This concept is fundamental in insurance, ensuring that the policyholder stands to gain financially from the preservation of the insured item or person. Insurable interest is required for a valid insurance contract; it establishes that the policyholder will suffer a loss if the insured risk occurs, thus justifying the insurance policy and helping to prevent moral hazard, where a person might intentionally cause a loss to benefit financially.

For example, if someone purchases home insurance, they have an insurable interest because they own the home and would face a financial loss if it were to be damaged or destroyed. This principle prevents individuals from insuring items they have no connection to and thus discourages insurance fraud.

The other options do not accurately describe insurable interest. A contract offering guaranteed returns pertains to investment rather than insurance principles. Control over the risk being insured suggests a level of management that is not necessary for the concept of insurable interest. A shared risk between multiple insurers relates to reinsurance, which is a different aspect of the insurance business, focusing on the spreading of risks rather than the initial requirement of having a financial stake in the insured entity.