Written by An insurable risk, as its name would seem to suggest, is any risk that can be covered by an insurance policy.
A risk must satisfy a number of requirements in order to be considered an insurable risk, including being fortuitous, non-catastrophic, and measurable.
1. A Large number of similar exposure units: Insurance works by pooling the risk of a large number of individuals or entities so that the impact of any one loss is spread out over the entire group.
When a group of people or items are being insured under a single pool, it increases the predictability of the loss occurring, which in turn increases the insurability of the risk.
Indeed, the Insurer is able to predict the probability of a loss occurring based on the law of large numbers.
2. Fortuitous: For a risk to be insurable, it must also be accidental, meaning it should be caused by an event outside the control of the insured.
For example, if a motor vehicle owner takes an insurance policy to cover the risk of loss of a car due to an accident, the risk of an accident will be considered fortuitous because the motor vehicle owner has no control over whether or not the accident would occur.
However, if the motor vehicle owner intentionally involves his car in an accident, then the risk of loss is no longer fortuitous because the owner has some control over whether or not the accident will occur.
Fortuitous also means that the insured should not be able to anticipate when the insured peril will occur.
For example, If the motor vehicle owner can reasonably predict that the accident will occur in three year time, then the risk is no longer fortuitous because it is certain to occur.
3. Non-catastrophic: The risk or loss to be insured must not be catastrophic in the sense that there shouldn’t be an overwhelming possibility of large losses for the group as a whole.
A catastrophic risk may be too expensive for an insurance provider to cover, as the potential losses or damages may be greater than the financial capacity of the insurance providers.
Risks like natural disasters or war may be too costly or difficult to insure since they endanger the insurer’s financial stability and render insurance coverage unworkable.
For example, in the event of an earthquake, the losses and damages could be so severe that it would not be financially feasible for an insurance company to provide coverage.
Only non-catastrophic risks, such as personal injury, automobile accidents, and fire accidents, are covered by insurance because they are financially feasible for insurance firms to handle.
4. Measurable: Another important characteristic of an insurable risk is that it must be measurable in financial terms.
By measurable, we mean that it should be possible to measure the likelihood and potential consequences of the risk occurring.
If a loss is measurable, it will be very easy for an insurable company to calculate the premium to charge for the coverage.
On the other hand, if a risk is not measurable, it will be very hard to calculate how much should be paid by the insured.
So, for a loss to be insurable, it must be measurable in monetary terms.
5. Economically feasible premium: The premium charge by the insurance companies should be neither too high nor too low.
In other words, the premium charged by the insurance company should be reasonable and indicative of the actual risk that the insurance policy is covering.
