The correct answer is B. Reject the proposal.
An insurable interest is a legal concept that requires an insured person to have a financial interest in the life or property that is being insured. This means that the insured person must stand to lose something if the insured event occurs. For example, if you have a life insurance policy on your spouse, you must have a financial interest in their life, such as being their dependent.
If the underwriter determines that the proponent does not have an insurable interest in the insured, they will reject the proposal. This is because there is no legal basis for the insurance contract and the underwriter would be taking on unnecessary risk.
The other options are incorrect because they do not take into account the requirement for an insurable interest. Option A would allow the proponent to purchase insurance with a reduced sum assured, but this would not address the underlying issue of the lack of insurable interest. Option C would allow the proponent to purchase insurance with a lien, which is a legal right to the insured property. However, this would also not address the lack of insurable interest. Option D would allow the proponent to purchase insurance with an extra premium, but this would also not address the lack of insurable interest.
In conclusion, the underwriter will reject the proposal if the proponent does not have an insurable interest in the insured.