Insurable Risk

September 29, 2009

Insurance is possible only when there is a risk of something happening to the thing insured. Also the risk should meet certain criteria which are given in the guidelines and laws governing insurance. Insurable risk is better understood when we look into the different characteristics that define it.

The first thing that can make a risk insurable is that it should be profitable or at least feasible for the Insurer. The premium which the insurer charges, should not only cover the different claims, but also his expenses and make some profit. The coverage of the risk should be something that many people want. For example auto insurance is required by many people and there can be lot of premiums collected which can offset any claims, expenses and also make profits.

The loss should be something which can be covered by the insurer. If the loss is too big and the insurer cannot pay, then there is no point of insuring. A situation might arise when an event will cause the insurer to pay claims to almost all of the policy holders at the same time. In such a situation, the insurer cannot sell more policies in that area of risk. For example an insurance policy covering loss by natural disasters, in a storm prone area, should only cover a percentage of loss due to storm.

The premium charged also should be within reasonable limits. An insurer cannot take coverage of a risk that are too big to handle. In such cases he will have to charge an exorbitant premium which will be impossible to pay by anybody.

The risk is always of a loss, and therefore this loss should be definable in monetary terms. The recovery of loss should translate into a specific amount, without leaving any room for speculation or doubt. If loss is not quantifiable, then the calculation of its premium also will be impossible and hence such risks cannot be insurable.

Another criteria for an insurable risk is that the occurrence of the loss should be fortuitous. The insured should have no control whatsoever in the occurrence of the loss. The loss happens in spite of the insured taking all precautions at avoiding the loss. Also the event of a loss should not be a direct result of speculation on the part of the insured. There is no insurance coverage for loss of money in the stock market, as the risk is based on speculation.