According to this principle, you must have an insurable interest in the life that is insured. That is, you will suffer financially if the insured dies. You cannot buy a life insurance policy for a person on whom you have no insurable interest.
Thus you must have a financial stake in the person or the property you are taking the insurance policy. So, you cannot take insurance for anything, for the loss of which you will not be financially affected.
Insurance is a legal-financial instrument that offers you to cover for your loss in case of any mishap in the future. The basic motive of insurance is to maintain economic sustainability. That is, you should not suffer any financial loss in case of any unexpected event.
Insurable interest for a company can be its employees, for a racer it will be his car or bike, etc. For an individual, it can be his vehicle, his home, his wife, etc.
This principle is important for an insurance company as it helps stop or reduce the moral hazard involved. If you can insurer even those who do not give you any financial interest, then you can just take insurance for anybody and wait for the worst to happen to get money.
To stop this practice, this principle was involved.
For example, you and your colleague both come to your office in your respective cars. Now you can take insurance only for your car and not your colleague’s since if something happens to your car, you will face financial loss.