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Calculable Loss

In Insurance a risk is transferred to another party, by paying a certain amount called a premium. Insurance is a form of risk management, to cover for a probable loss. An insurance policy is a contract between two parties. One is the insurer, who sells the policy and is willing to underwrite the risk of loss, and the other is the person buying the insurance coverage.

The insurer has to arrive at a reasonable premium amount to charge for the risk he is willing to take. For this several factors have to be considered and there are specific formulas to arrive at a figure. Most of the risks which are insurable share certain common features or characteristics. Based on these factors the insurer is able to gauge the extent of risk he is taking and also the viability of getting more such customers, thus increasing the premium base.


Among characteristics of insurable risk is the one called Calculable Loss. This one is crucial in determining a fair premium amount. In studying Calculable Loss two factors are necessarily to be ascertained. One is the probability of loss. As its name suggests, it can only be a probability, which means it is an estimate, and not an exact calculated figure. Various factors are studied to determine how often a loss occurs in a particular type of undertaking. Large amounts of data is collected on the matter and the probability of loss is estimated.

The second element in Calculable Loss is the attendant cost. The insured person has to have a copy of the insurance policy and a verifiable proof of loss to make a claim. The policy certificate is issued at the time of buying the insurance and the proof of loss has to be gathered by the insured when the loss occurred. For example if a lady has taken an insurance policy on the life of her husband, then in the unfortunate event of death of the husband, she has to produce the death certificate of the husband, as a proof of loss to make a claim. In this case the amount of claim will be straightforward as the sum assured under the policy. But taking another example, of an auto insurance, the loss has to be calculated when an accident occurs. Here the adjuster of the insurance company will determine the actual amount of loss which is to be given to the insured in the event of a claim, under the particular policy.

Tags: coverage, Insurance, policy, risk

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