What is the characteristic of insurance contracts that incorporates an element of chance for both parties?

The characteristic of insurance contracts that incorporates an element of chance for both parties is known as "aleatory." This term refers to situations in which the contract's benefits are contingent upon uncertain future events. In insurance, the insured pays premiums based on the chance of a loss occurring, while the insurer assumes the risk of having to pay a benefit only if the loss happens.

In an aleatory contract, one party may receive significantly more value than they initially paid, depending on the occurrence of an event like an accident, illness, or death. For instance, a policyholder who pays a small premium for life insurance may receive a large death benefit if they pass away unexpectedly, illustrating the uncertainty and risk inherent in the arrangement for both parties. This is a fundamental principle of insurance, creating a mutual interest in the occurrence of the event that triggers the contract's benefits.