7 Elements of Insurable Risk

The physical hazards include slippery
surfaces, icy conditions, faulty building construction, and other similar risks. Exposure means a condition
that may expose you to risk or liability. For example, on a new part-time
job, Joe cleans windows on skyscrapers. He is exposing himself to the
chance of falling from great heights.

That is, there is a proportionately smaller deviation from expected losses than would exist with a group of 1,000 houses. Similarly, if the group is increased to 100,000 houses, the variation between actual and expected losses would be likely to increase in absolute terms, but it would decline proportionately. One additional loss from 100,000 houses is proportionally less than one additional loss from 10,000 houses and even less than one additional loss from 1,000 houses. It is common to communicate consequences or losses at specific reference return periods, i.e., using specific points from the loss frequency curve only.

Analysis of the Insurable Risk Characteristics of Healthcare

To be insurable, a risk must involve the chance of loss that is unexpected and outside the insured’s control. Loss must be the result of an unintentional act or one that occurred by chance in order to be insurable. In essence, it must be beyond the control or influence of the business. Losses also need to be random, meaning that the potential for adverse selection does not exist. In reality, however, this is impossible because catastrophic losses periodically result from floods, hurricanes, tornadoes, earthquakes, forest fires, and other natural disasters.

Usually, an insurer will counterbalance their own risk (of insuring you) with premiums, exclusions, and predetermined dollar limits. Consider mid-market companies, as well, where cybersecurity remains one of the primary risks. Sadly, these businesses are often pegged as “low-hanging fruit” for cybercriminals. As a result, insurers have mounds of statistical knowledge to base their loss estimates, making cyber insurance increasingly popular.

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The losses are fairly predictable and can be measured in money terms—loss of peace of mind, tension, etc. Insurance providers look for these to measure levels of risk and premium levels for insurance protection for anything. O’Reilly members experience books, live events, courses curated by job role, and more from O’Reilly and nearly 200 top publishers. Loss run reports are, essentially, the insurance world’s equivalent to credit scores. This report will reflect on how well the business is operating and managed. View all O’Reilly videos, Superstream events, and Meet the Expert sessions on your home TV.

For example, the contract may cover loss by fire at a specified location. For this contract to be effective, it must be possible to determine when, where, and how much loss occurred. If this cannot be established, it is impossible to determine whether the loss is covered under the terms of the contract. The fact that pain and suffering is hard to measure in dollar terms increases the insurer’s risk when calculating rates for liability insurance. One other reason the requirement of definiteness is essential is that it is necessary to accumulate data for future predictions. Unless such data can be accurate, they cannot provide the basis for useful predictions.

Examples of Insurable Risks

Using loss frequency curves based on non-exceedance probabilities compared to exceedance probabilities (Fig. 2.4) makes communication with stakeholders easier. If only a limited number of values are available for consequences and their probabilities, the ranges in-between these values have to be estimated. The lowest expected annual loss would result from consequences staying constant until the next value of non-exceedance probability is reached. The highest expected annual loss results from consequences jumping to the next level right beyond each value of non-exceedance probabilities (see Fig. 2.8). If the final decision is not impacted by this range of possibilities, no further investigation is needed.

If there is another emergency service in the vicinity, it is acceptable that the access road is being flooded as long as the interruption of the access is of short duration. If the emergency service characteristics of insurable risk is the only one in a larger region, a flooded access road is not acceptable. The loss exposures to be insured and those observed for calculating the probability distributions must have similarities.

Back to their actuaries, professionals that mathematically, statistically, and financially analyze financial risk by running a plethora of statistical models and analysis. Some of those calculations ultimately boil down to the “law of large numbers,” which is the use of an extensive database used to forecast anticipated losses. Also, it is important to note that randomness is ensured by underwriters who guard against adverse selection, the tendency of the poorer than average insured to seek or continue insurance coverage. This requirement is necessary so that a proper premium can be charged that is sufficient to pay all claims and expenses and yield a profit during the policy period. Lost data can be compiled over time, and losses for the group can be predicted with some accuracy. The loss costs can then be spread over all insured’s in the underwriting class.

Large Numbers of Exposure Units

Speculative risk has a chance of loss, profit, or a possibility that nothing happens. Gambling and investments are the most typical examples of speculative risk. The traditional insurance market does not consider speculative risks to be insurable. The probability of first damages can have an impact on the (accepted) risk. Furthermore, the dealing with risks can be different for hazards with frequent damages compared to hazards with rare damages. Storms (frequent) and earthquakes (rare) are hazards with such a difference in probability of first loss (Fig. 2.5).

Regardless of the industry, companies can’t transfer each one of their risks to an insurer. What’s more, insurance companies can’t cover every last risk on the plant. Sometimes the exposure is too costly, easy to manipulate, or impossible to value. Making a few reasonable assumptions is sometimes providing sufficient accuracy.

Elements of Insurable Risk

Some stakeholders might be more interested in the probability of damages reaching or exceeding a certain threshold or the damage at certain probabilities. The characteristics of risk proposed in this chapter are fostering the dialogue with stakeholders and helping in making risk analyses societally relevant. It can be seen as the basis for transdisciplinary frameworks as those proposed by Fischer et al. (2021) and Pohl et al. (2017).

Start an application today to find the right policy at the most affordable price for your business. Regtech insurance is specifically designed for regulation technology companies — but what risks do regtech companies face? Let’s discuss some prominent challenges and solutions for this sector. Physical hazards exist throughout the workplace
and increase the chances of accidents.

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Consequence in this case is the consequence of an impact, e.g., a physical damage, a monetary loss, or an interruption of services. The consequence is usually a combination of exposure and vulnerability for a particular hazard intensity. Risk can therefore be considered a combination of hazard, exposure, and vulnerability, similar to the definition of weather and climate risks used by the IPCC (2012).

• Since the insurance pool is structured to be sufficiently large, the price charged by the insurer for buying the risk is generally low.
• If there is not determinable distribution, there is no question of issuing a cover by an insurance company.
• And, of course, any allegation related to a criminal act or intentional wrongdoing on your part is generally uninsurable.
• Learn the differences between insurable and uninsurable risk, how to identify both types of risk, and ways to assess and manage risk in the workplace.
• A fourth requirement is that the chance of loss should be calculable.
• Most insurance providers only cover pure risks, or those risks that embody most or all of the main elements of insurable risk.

He walks into your insurance
office in a shiny new Gucci suit with a Pave Diamond Dial Rolex watch
strapped onto his wrist. Joe seeks a homeowner’s policy and life insurance
for his new house since he plans to pursue hobbies that make him susceptible
to heart attacks. The life and health insurance on Joe’s place and
aren’t considered pure risks.