An insurable risk complies with the norms and specifications of an insurance policy in such a way that the criterion for insurance is fulfilled.

An insurable risk complies with the insurance policy's norms and specifications in such a way that the insurance criterion is met.

It is essentially any risk that is covered by insurance companies. For any risk to be insurable, it must have the following characteristics 

1. A large number of exposure units: Insurance theory is founded on the law of large numbers, and these large numbers must have homogeneous risk exposures for losses to be reasonably predictable.

2. Defined and measurable loss: Another feature of insurable risk is that the financial losses that result from it should be quantifiable financially.

That is, we must be able to estimate the financial impact of the loss when it occurs.  

Risks such as mental anguish and emotional damage, for example, are not covered because they cannot be measured financially.

3. Loss must be fortuitous: The loss must be accidental and random. That is, there should be a probability of the loss happening or not happening.

An insurable risk should not be something certain to happen. It should result from unintended action that happens by chance.

4. Non-Catastrophic risk: An insurable risk should not be a catastrophic risk. 

A catastrophic risk is a risk where a large number of people are exposed to the occurrence of a peril.

In other words, it should be unlikely that a large percentage of the homogenous group will be subject to the adverse event, otherwise, the insurance company will be ruined.

Indeed, most insurance firms do not cover catastrophic risks like earthquakes, hurricanes, and tsunamis because the financial consequences of such events are usually devastating and very significant.

5. Premium should be economically viable: An insurance company's pricing (premium) should be moderate and fair enough to make the insurance firm wealthy while protecting the insured from risk.

6. Significant losses: Although insurable risk should not be catastrophic, it should not have an insignificant financial impact

In other words, an insurable risk should not be something that anyone can easily cover on their own 

Rather, it should be a risk that has significant financial consequences for the insured, otherwise, no one would purchase an insurance policy 


Post a Comment


Post a Comment (0)