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WHAT ARE THE NATURES OF INSURABLE RISK?

 THE NATURE OF INSURABLE RISK... 

The risk is at the heart of insurance. If there were no risk, there would be no insurance. But the question is does the insurance protect against all kinds of risks? Certainly, it does not. Some risks are insurable and some are not Then how do we know which risk is insurable and which is not insurable? Is it possible to compile a list of insurable risk? If we attempt to do so, the list would be endless. Therefore, it is essential to understand the nature of insurable risk. Insurable risk should meet the following requirements. 

1. Fortuitous 

2. Financial value 

3. Large number of exposure

4. Pure risks 

5. Public policy 


Fortuitous 

The insurable risk is fortuitous in nature. It means the happening of the event must be accidental and the loss that arises must be unintentional loss. The loss caused by wear, tear and depreciation are not insurable risk because it is not accidental. Similarly, the loss should not be the result of deliberate action of an individual. For example, if you put your house on fire and claim insurance; you are not paid because the loss is due to your deliberate action. If insurance companies pay loss of deliberate action, it will increase moral hazard. 


Financial value

The essence of insurance is to act as a risk transfer mechanism and provide financial compensation for loss. Insurance does not remove the risk, but it does endeavor to provide financial protection against the consequences. If this is the case then the risk which is to be insured must result in a loss which is capable of being measured in financial terms. In case of property insurance, the financial loss can be easily determined after the incident takes place. In case of life insurance, it is impossible to place value on life of a wife, husband or child. For that reason, an amount is determined before the life insurance policy is purchased. That sum is taken as the financial value of the life for insurance purpose. 

Large number of exposure units 

A large number of exposures is a characteristic of an insurable risk. It means that there should be large number of similar units subject to same peril, Given a sufficient number of exposures to similar risks, the insurer can forecast the extent of their loss. In other words, it helps to apply the law of large number in determining premium. However, there are some exceptions to this rule: for example, the space satellites and a painter’s fingers, though they are rare, are insured. 

Pure risks 

Pure risks are insurable and speculative risks are not insurable. You can insure against pure risks such as premature death, damage to property from fire, etc.; but you cannot insure for speculative loss the loss that arises, for example, in gambling or betting on a horse race. 

Public policy 

The common principle of law is that contracts must not be contrary to what the society would consider to be the right and moral thing to do. For example, a contract to kill a person or a contract to inflict damage on the property of people is unacceptable. Similarly, the risk that goes against public policy is not insurable risk. For example, you bear great risk of paying heavy fine for drunken driving. But you cannot insure it because the risk is not insurable risk. The reason is that the society would not like to see a drunken driver escape paying fine simply by paying premium for insurance. 

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