by D. Victor

Created on: January 22, 2009   Last Updated: January 26, 2011

Insurance is a risk-management tool. However, insurers are in the business of insurance as a going concern and to make a profit. They are not inclined to insure every risk that people or entities may face. On the contrary, insurers are quite discriminating about the risks that they cover and whether they accept the risk of a particular proposal.

An "insurable risk" is a danger of financial loss that an insurer is willing and able to cover. Whether a risk is insurable or not is not determined capriciously. There are eight fundamental characteristics of an insurable risk. If any one of these characteristics is not present, an insurable risk becomes uninsurable.

1) Uncertainty

The timing of the loss cannot be expected. Even in the case of life insurance- where death is expected- the timing of death is the subject of speculation. Therefore, if a loss is expected (terminal illness/hurricane warning) or forecasted otherwise, the risk would most likely not be insurable.

2) Capricious

As far as the policy owner is concerned, the loss must happen by chance or be unpredictable. It would be alright if someone is planning to burn down your home. However, if an insurer is aware that you have knowledge of this; the risk will be uninsurable. This also suggests that the policy owner cannot intentionally cause the loss - whether directly or indirectly.

3) Determinable risk

An insurer must be able to apply methods and techniques to determine the likelihood of the loss. Where life insurance is concerned, this is based on risk groups and health information, among other factors. With home insurance, underwriting factors like location and market value are significant. Insurance involves a lot of actuarial work.

4) Sufficiently large market for that risk

If there are not enough people in the market for a particular type of insurance, then the risk would not be spread over a large enough segment. This means that the likelihood of an underwriting loss may be to great for the risk to be insurable.

5) Reasonable cost

Premiums for an insurable risk should not be prohibitive; otherwise people would not be willing or able to purchase the insurance.

6) Significant loss

Insurance was not designed to cover expenses that people could easily cover for themselves. If this were the case, then premium rates would be significantly higher. This is the basis for advising people not to take insurance for losses that their finances could easily withstand. The policy owner bears the additional

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