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What is insurable risk

what is insurable risk

Elements of an Insurable Risk

1. The loss must be due to chance. Regular recurring losses such as shoplifting in a supermarket are built into the price and would not be insurable as it is not fortuitous.

2. The loss must be definite and measurable. This means that there must be bills to establish "proof of loss," not just casual references.

3. The loss must be predictable, meaning it must be of such a nature that its frequency and average severity can be readily determined to establish the required premium.

4. The loss cannot be catastrophic. All individual losses are personal catastrophes. The reference here is to national or area disasters, such as floods, riots, wars, earthquakes, etc. These events will often have coverage amount limitations in the property and

casualty insurance areas.

5. The loss exposures must be large. To avoid adverse selection, there must be enough exposure to losses for the frequency to be predictable and to be grouped for the purpose of establishing rates.

6. The loss exposures must be randomly selected. Concentration of risks by area, age groups, occupations, economic status, etc. can lead to adverse selection. A prominent example of the failure to avoid concentrations of risks is demonstrated by the efforts of numerous home insurers to reduce their risks, after Hurricane Andrew and several other smaller hurricanes.

The following question is a review of the content on this page. Answer and then click below to check your response.

Elements of insurable RISKS include all the below, EXCEPT:

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Category: Insurance

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