CHAPTER 3

RISK AND INSURANCE

Meaning of Risk
Nothing in the world is absolutely certain. Uncertainty surrounds us every time. Uncertainty is a
probabilistic state where more than one outcome is possible. One of such outcome is possibility
of happening improbable causing harm, injury, loss, damage, or destruction. Risk is the
possibility of such harm, injury, loss, damage, or destruction. Risk arises out of uncertainty and
most real-life situations involve uncertainty. Risks are everywhere in life and they range from
unavoidable risks to those assumed by choice. If you own property you face risks, without
choice, from various sources such as fire, storm or theft.
Example of risk assumed by choice includes crossing the street when the light is red.
When we talk about a risk, we observe certain common features
• The event occurring is undesirable
• There is the possibility - not a certainty of event occurring, a possibility of an adverse
deviation from a desired outcome that is expected or hoped for
• There is unpredictability: that is, it is not known when the undesirable event will occur, or
indeed whether it will occur at all.
• There is uncertainty as to the extent of the loss which will arise should the undesirable event
actually occur.

Risk and Uncertainty

While "risk" is related to "uncertainty," risk and uncertainty are separate concepts.
What is uncertainty? In fact uncertainty is a state of mind, characterized by doubt lacking
sureness about what will happen in the future. It is based on the mental state of an individual
who experiences uncertainty as to the outcome of a given event. Thus, it is subjective and
experienced differently by each individual, despite the same set of facts or objective reality. For
example, one boy may refuse to jump from a tree with a fear of being injured, while another may
immediately jump. When one jump from tree there is the risk—the possibility of bodily injury
and it is the same for both boys, but the two boys' state of mind as to outcome i.e. uncertainty
differs greatly.
To understand the difference between risk and uncertainty, it will not be out of place to talk
about measure of uncertainty. Uncertainty since based on individual’s perception, it is subjective
and as such has no measure. Risk is a possibility of an adverse deviation from a desired outcome.
It is a variation in outcome from what is expected or desired and such variation is measurable
based on information available. Thus while an uncertainty is not measurable (subjective), a risk
is measurable without subjectivity (objective). To summarise we may say that risk is an objective
uncertainty.

Risk and Probability

For purposes of insurance, risk is defined as the possibility of loss. This definition of risk refers
to the possibility, not the probability of loss. Possibility means that something could occur.
Neither it is certain nor can it be measured. Probability is the proportion of times that events will
occur in the long run. The probability of an occurrence can be expressed numerically as a
number between 0 and 1 or as a percentage. For anything that is absolutely certain not to happen
there is 0 percent probability of loss and when it is absolutely certain to happen there is100
percent chance probability of loss. In both the situation there is no risk. Anywhere between 0
percent and 100 percent probability of loss, there involves some uncertainty and thus risk.
Probability may be the same for two events, but the risk could be different. Assume that you
purchased two shares – one of company A and another of company B. Both the shares may have
the potential of gain and same expected return, say 10 percent. Talking about probability, there is
50 percent probability of gain and 50 percent probability of loss in both the share. But when the
actual return shall come there may be variation or dispersion from expected return. (Variation or
dispersion that exists from the average or expected value is called standard deviation in
Statistics.). However, the standard deviation of the returns of the first stock may be 5 percent,
while the standard deviation of the returns of the second stock may be only 25 percent. Since
standard deviation of second share is more, it is more risky. Thus, the probability for both stocks
is 50 percent, but the second stock is of greater risk.

Risk and Insurance

We are at the beginning stage of study of insurance and as such we can’t immediately jump to
thorough understanding about insurance. But at least we know that a risk may result into a loss
and the principal purpose of insurance is to protect against financial loss which is unexpectedly
(accidentally) created by a specific event or cause producing a [Link] is the foundation for
insurance. The world of insurance clusters around the risk. Without risk, there would be no need
for insurance.
Losses caused by risk may be economical (monitory or financial) or non-economical
(nonfinancial or emotional) like pain, sufferings, loss of love etc. Non-economical losses are
subjective and their valuation is not possible. No amount of money can compensate emotional
losses. Hence insurance protects against financial losses only. It is, therefore, for the purpose of
insurance risk is defined as under:
“Risk is uncertainty concerning the financial loss.”

Risk is not the loss itself

Generally, the term loss is used to denote the absence of something previously possessed. Loss
(financial loss) may be defined as a decline in value of your possession usually in an
unexpectedly or relatively unpredictable manner. Either you no longer have the possession or the
value of the possession is declined. Suppose there are 10 notes of Rs. 1000 in your purse. If
somebody picks up the purse, you have lost your possession of your purse including the money.
But if he picks up only one note, money possessed by you is declined by Rs. [Link] that risk
is not the loss itself, but the uncertainty of loss. There are some losses that are certain to occur
eventually, such as when a machine finally wears out or any part of your car eventually stops
working. Such losses are certain or expected; not the result of risk.
Losses need not to be related to risk always. If you gift your property to a friend you no longer
own that property. This is planned and intentional loss, not the result of a risk. Thus risk may
result into the loss but every loss is not risk.

Classification of Risk
Risks may be classified in many ways. These classification are sometimes overlapping in the
sense that one risk may fall under more than one class. Some of the classes which are important
for the study of insurance are as under:
Dynamic and Static risks
Dynamic risks are the risks resulting directly from changes in society or in the economy.
Changes in the price level; consumer tastes, income and output, and technology may cause
financial loss to the members of the economy. For example, the low-carbohydrate diet fad caused
a noteworthy drop in income for some business firms which produce high-carbohydrate food.
Changes in technology cause losses to the businesses firms which fail to adapt since their
technology becomes obsolete.

Static risks are those risks which exist apart from changes in society or the economy. These
risks arise even if there were no changes in the society or economy. Accident, disability, fire,
theft are the examples of these risks.
Distinction
Dynamic risks do not occur with any precise degree of regularity. They are generally considered
less predictable than static risks. Hence insurance is usually not available for these risks.

Static risks tend to occur with a degree of regularity over time and, as a result, are generally
predictable. Since static risks are usually fairly predictable, these are usually readily insurable.

Fundamental and Particular risks

Fundamental risks are those which affect the whole society (e.g. economical, political or
natural catastrophes). They affect large segments or even all of the Population. Unemployment,
war, inflation, earthquakes are all the examples of fundamental risks.

Particular Risks involve losses that arise out of individual events and are felt by individuals
rather than by larger segment of the society. Damage to a house by fire, injury in an accident,
theft of the property are examples of particular risks.
Distinction
Fundamental risks are caused by conditions more or less beyond the control of individuals who
suffer the losses and they are not due to the fault of any one in particular. These risk are
impersonal Hence, society or the government rather than the individual has responsibility to deal
with them. Many governments deal these risks through financial compensation, subsidy or social
insurance programmes. However some fundamental risks like earthquakes are dealt by individual
through insurance.
On the other hand Particular Risks involve losses that arise out of individual events. These risks
arise from factors over which the individual may exert some control. So such risks need private
insurance.
Why natural calamities are not dynamic risks?
Dynamic risks are those risks which arise out of changes in the society or economy. Natural
calamities do not arise out of changes in the society or economy. Nature contributes to them and
as such they are also termed as “Act of God”. Instead of arising out of changes in economy such
risks may bring the change in the economy and bring about further risks arising out of such
effects in economy. Natural calamities are fundamental risks. Only point of similarity between
dynamic risks and natural calamities is the effect, both the risks affect larger public and to some
extent society should own these risks.
Pure and Speculative risk
Pure Risks are those situations that involve the chance of loss or no loss. A Car driver always
faces the risk of accident. If accident occurs, the driver may suffer financial and physical loss. If
it does not occur, however, there is no gain. Pure risks are "pure" in the sense that they do not
mix both profits and losses.
Speculative Risks are those risks which involve three possible outcomes: loss, gain, or no
change. There is possibility of either a profit or a loss. For example, when you purchase shares,
you are speculating that the value of the share will rise and that you will earn a profit on your
investment. At the same time you know that its value could fall and that you could lose some or
all of the money you invested. Finally, you know that the value of the share could remain the
same—you might not lose money, but you might not make a profit.
Distinction
Pure risks are insurable whereas speculative risks are uninsurable.
The distinction between pure and speculative risks is important for the students of insurance,
because normally only pure risks are insurable. Pure risks exist. A person would like to avoid
pure risks whereas speculative risks are voluntarily accepted because there is possibility of gain.
Hence speculative risks are not insurable.

Forms of Pure Risks

Every body has to face pure risk in life. Individuals and business organisations all are confronted
with pure risks. These risks numerous but can be classified as
under:

Personal Risk
Personal risks are risks which directly affect an individual. These risks involve the possibility of
the loss of earning, extra expenses, and the depletion of financial assets. There are four major
personal risks:
■ Risk of premature death
■ Risk of insufficient income during retirement
■ Risk of sickness or disability, and
■ Risk of unemployment

Property Risks
Anyone who owns property is exposed to property risks—the risk of having property damaged or
lost from numerous causes. A house may be damaged by fire, a car may be stolen or there may a
break-down of machine. Property risks embrace two distinct types of loss: direct loss and
indirect or "consequential" loss. Direct losses are the first or immediate losses that arise from an
event causing risk. An indirect loss is a loss that occurs only as a secondary result following the
occurrence of any event causing direct loss. For example, if a house is severely damaged by a
fire the direct loss is the cost to repairing the damages. Till the time the house is under repair the
owner has to arrange alternative accommodation. Rent paid for such alternative accommodation
is an indirect loss due to fire.
Liability Risks
The law provides that one who has injured another, or damaged another's property through
negligence or otherwise, can be held responsible for the harm caused. If a pedestrian is injured
by your car, you are legally liable to pay him compensation which is financial loss to you.
Liability risks therefore involve the possibility of loss arising out of the legal obligation to pay
damages for injury or property damage caused by one’s negligence.

Risks arising from failure or default of others

When another person agrees to perform a service for you, he is obliged to perform as you expect.
If that person fails to meet this obligation you may suffer financial loss. Possibility of such losses
is called risk arising from failure or default of others. Failure of a contractor to complete a
construction project as scheduled, or failure of debtors to make payments as expected are the
examples of these risks.

Examples of Pure Risks

Individual-
Personal -Injury Sickness, death
Property- Home , Belongings, Bike
Liability-Legal liability for accidental death of maidservant while working ,While playing
thrown ball damaged neighbour's window who sued you in court of law, Your pet dog bites the
neighour who sued youin court of law
Business
Personal-Injury, Death
Property -Buildings , Machinery, Stock
Liability-Legal liability arising out of operation of business, Legal liability arising out of goods
supplied. Safety of employees

Risk Related Terms-Peril and Hazard

Risk is the possibility of loss. For loss to happen there must be some cause and there must be
certain condition. In the subject of risk, cause is called peril and condition that leads to loss is
called hazard. Thus risk is closely associated with Perils and Hazards. Following paragraphs
shall deal with this subject.
Peril
A Peril is the source or cause of loss. It is the event which gives rise to loss Thus, if a car is
damaged due to accident, the peril, or cause of, loss is accident. There are numerous perils in the
world. Fire, flood, theft, earthquake are all perils that can cause a loss to property and people. A
loss occurs when a resource is exposed to a peril.
Hazard
A hazard can be defined as a condition which influences the operation of the peril. A hazard may
increase or create the chances of loss from a given peril. It may increase the frequency or
severity of loss due to a given peril. Poor electric wiring creates the chance of short-circuit which
may cause fire. On a blind turn chances of road accidents increase. So poor electric wiring and
blind turn are hazards.
To illustrate further we give example of two buildings having poor electric wiring. Suppose one
building is constructed of brick and the other of wood. Due to poor electric wirings, there occurs
fire. The study of these incidents revels following:
• In both the incidents it is poor wiring which created the chance of loss. So poor wiring is the
hazard.
• When fire started the wooden building suffered more loss as compared to the building
constructed of brick. Wooden construction increased the severity of loss. So construction is
hazard- wooden construction is more hazardous.

Difference between Risk and peril

Risk is the possibility of loss. Neither it is a loss itself nor is it a cause of loss. In a stormy
weather a farmer feels risk of loss of mango crop. This is the possibility. There is no certainty. In
actual out-come, there may not be loss of crop. Thus farmer’s experiencing the risk is neither a
loss nor a cause of loss. Contrary to this peril is actual cause of loss.

Difference between Peril and Hazard

A peril is cause of loss whereas a hazard is a condition – that may create or increase the chance
of a loss arising from a given peril or under a given condition. “Peril is the source of loss
whereas hazard is the source of peril.” Flood is the peril because it causes loss (source of loss)
but the proximity of the house to the river is the hazard because it creates chances of peril of
flood (source of peril).
Hazard itself does not cause loss. So it is not a peril. Wooden Construction is hazard. However
construction in itself does not cause fire. But once a fire (the peril) starts then the building of
wooden construction will, all things being equal, suffer greater damage. Not all but some perils
are hazards also. Sickness is a peril. It may cause loss of income or incurring expenses on
treatment. But at the same time it creates the chance of premature death(peril) and hence it is
hazard also.

Classification of perils for the purpose of insurance

For the purpose of insurance perils are classified in three classes:
1. Insured perils
2. Excluded perils
3. Uninsured perils
1. Insured perils - Insured perils are those perils which are protected by insurance. Insurance
company shall pay the loss which occurs due to these perils. For example if the loss is caused by
fire the peril which operated is ‘fire’. Fire peril is insured peril in fire insurance.
2. Excluded perils - Excluded perils are the perils specifically mentioned in the policy of
insurance on operation of which the insurance company shall not pay the loss e.g. ‘Fire caused
by War’ is an excluded peril under a fire insurance policy. So if a fire is caused by war, the loss
is not payable by fire policy.
3. Uninsured perils –Insurance companies provide specific insurance policy for covering a
specific class of perils and while doing so what is intended to be insured or excluded is
mentioned in the policy. That specific policy is not at all concerned with rest of the perils which
are neither mentioned in the policy as insured nor as excluded. Rests of the perils are called
uninsured perils. For example ‘Theft Insurance Policy’ is concerned with losses related to theft.
It has no concern with the peril of flood. So flood is uninsured peril for the purpose of Theft
Insurance. In other way we may say that uninsured perils are those perils which have no mention
in the insurance policy either as covered or as excluded also.

Classification of Hazards
For the purpose of insurance hazards are normally classified into three categories:
1. Physical hazard
2. Moral hazard
3. Morale hazard

1. Physical hazard - Physical hazard is a hazard arising from the physical conditions of the
subject matter which increases the frequency or severity of loss. In another way it may be
described as hazard arising from the natural qualities of the subject matter. Poor construction of a
building is a physical hazard since it is the physical condition of a building which creates the risk
of collapse. Card Board packing of a material is a physical hazard since it is the physical
condition which may lead to possibility of tearing off resulting into loss of or damage to the
material. High blood pressure is a physical hazard because it creates the possibility of strokes due
to bleeding in the brain (brain hemorrhage). The following are few more examples of physical
hazards:
Storage of petrol on premises, defective breaks on a car, open manhole in the street, and
improper water drainage systems - each of these conditions increases the chance of a loss
occurring or the size of the loss if one does occur.
2. Moral hazard – Moral hazard is a hazard arising from individual’s dishonest tendencies or
character defects in an individual which increase the frequency or severity of loss. Moral hazard
arises from the nature and behaviour of the person connected with the subject matter of
insurance.
Examples of moral hazard include tendency to cause deliberate damage in order to collect
insurance proceeds or to intentionally inflate claims for insurance proceeds beyond the actual
size of the sustained loss.
3. Morale hazard (Remember ‘e’ suffixed to moral hazard) – Morale hazard arises when a
person is less careful or indifferent towards the loss because of the existence of insurance. He
develops an attitude” don’t worry, it's insured". When a person has purchased insurance, he may
have a more careless attitude towards preventing losses or may have different attitude towards
the cost of restoring damage. Such attitude denotes morale hazard. Rash driving after having an
insurance on car or keeping doors open after purchasing theft insurance for contents of house are
the example of morale hazard.

Techniques of handling or managing risks

As risk is the antithesis (opposite) of security, everybody naturally strive to manage the risk.
Techniques to manage the risk fall into one or more of these four major categories:
 Avoidance
 Control
 Acceptance
 Transfer

Risk avoidance
Risk avoidance includes not performing an activity which gives rise to the risk. A risk may be
avoided by not accepting or entering into the event which has hazards. Following are few
examples:
 A firm that produces a highly toxic product which frequently causes accidental injuries
may stop manufacturing that product.
  The risk of damage by flooding may be avoided by moving to another site well above
recorded flood levels.
 Not to buy a property or business in order to not take on the liability that comes with it.
 Not to fly in order to not take the risk of airplane being hijacked.
Avoidance may seem the answer to all risks, but it is impractical. It has severe limitations
because such a choice is not always possible, or if possible, it may require giving up some
important advantages. Nevertheless, in some situations risk avoidance is both possible and
desirable.

Risk control
Risk control works by either loss prevention, which involves reducing the probability of risk, or
loss reduction, which minimizes the loss. Following are few examples:
 By installing fire extinguishers in your home, you can reduce the damage that could be
caused by a fire.
 You can lower your risk of illness by eating properly and exercising regularly.

Risk Acceptance or Risk Assumption or Risk Retention

This involves accepting or retaining the loss when it occurs. One can assume or retain the risk
without engaging in any special efforts to control it or to transfer it . Risk retention is a viable
strategy for small risks which are insignificant or where the cost of other methods of treating the
risk would be greater over time than the total losses sustained. For example an oil mill
experiences that there is a loss of .5% oil while it is handled and transported. Instead of wasting
time and money on controlling such a minor loss, the mill owner assumes the risk and treats it as
a part of operational cost. This is called ‘assumption or retention of risk’.
Retention of risk may be intentional after identifying the risk or it may be unintentional in
absence of knowledge of risk exposure.

Risk Transfer
Risk transfer means causing another party to accept the risk. It may be possible to transfer the
risk to other party. Following are few examples:
• One can subcontract the activity which creates the risk. Risks in construction or other
contractors are often transferred this way.
• A landlord can make contractual arrangement with a tenant whereby the tenant shall be liable
for any loss to property rented.
• Certain risk can be transferred to an insurance company by taking insurance. Insurance is the
best way to transfer the risk. Insurance is a contract under which the risk from individuals or
businesses is transferred to the insurance company for a fee called insurance premium. The
insurance company agrees to make good the loss when a specific loss occurs. When an insurance
company agrees to provide a person or a business with insurance protection, it issues an
insurance policy. The policy is a written document that contains the terms of the contract
between the insurance company and the owner of the policy.

Risk analysis
Risk analysis quantifies exposures and losses so that probabilities of future losses can be
projected. Such analyses invariably address the "frequency" and "severity" of losses. The
frequency/severity profile helps to assess the level of risk.
Frequency of Loss Frequency denotes how often events happen. Frequency of loss refers to the
actual numbers or times the same or similar loss occurs. In many cases a single loss incident is
not significant in terms of the amount lost. An example is the loss of a calculator. Loss of a
calculator in one incidence costs less than Rs.100, which does not amount to a large loss.
However, if the frequency or numbers of calculators lost increases during a short period of time,
the total amount of the loss increases in direct relation to the increased incidence of lost
calculators.
Severity of Loss
Severity denotes how serious when any event does happen. Severity of loss refers to the size or
cost of the loss. In the example above, the single incident of a lost calculator is not a severe loss
since the cost of one calculator is less than Rs.100. However, the loss of one computer is
considerably more severe to a person. It costs Rs. 20000 and upwards.

Risk Management Matrix

Frequency and severity of loss decide the way for managing the risk. This is suggested in ‘Risk
Management Matrix’ as under:

Type of Loss Loss Loss Appropriate

Class Frequency Severity Way

1 Low Low Retention

2 High Low Loss control and Retention, Insurance
3 Low High Insurance
4 High High Avoidance

Risks considered by insurers are either high frequency with low severity or low frequency with
high severity.
High frequency/low severity refers to incidents that occur often but individually are not
financially severe. Most car accidents, thefts, or house fires would fall into this category.

Low frequency/high severity refers to incidents that do not occur very often but when they do,
they may have serious financial consequences. Natural disasters such as earthquakes, hurricanes,
a petrochemical fire etc fall into this category.

Insurable Risks
The relationship of risk and insurance
We know that every human being, every business, and every item whether living or not is
exposed to risks. The adverse consequence of any risk results into financial losses. This is the
reason why we try to respond to the problem of risk taking various measures. As we have studied
that one of the ways of dealing with the problem of risk is ‘risk transfer’.
Risks with high frequency/low severity or low frequency/high severity are dealt with insurance.
Through insurance risk is transferred to insurance company. Thus insurance is concerned with
risk, and its primary purpose is to eliminate or to reduce the financial losses which arise from the
existence of risk.
The act of risk transfer does not in itself provide a means for controlling risk i.e. avoiding,
preventing or reducing the actual event. Insurance does not save an insured property from fire. If
fire occurs, the loss shall be there. Insurance only transfers the financial impact of such loss
toinsurance company.
Insurance is not available for every risk. This is the subject of ‘insurable’ and ‘uninsurable’
risks.
An "insurable risk" is a risk which insurance company is willing and able to cover. Whether a
risk is insurable or not is not determined whimsically. The test of insurability from the view
point of insurance companies is based on certain fundamental characteristics of risk. If any one
of these characteristics is not present, a risk becomes uninsurable. These are:

1. The risk must be of fortuitous or accidental in nature – A risk is considered wholly

fortuitous when the actions of the insured have not been a causal factor in its occurrence. As
such, fortuitous losses are unintentional. The risk should not be expected or inevitable.
If the risk is expected or inevitable and is bound to occur, then it cannot be insured against. In
fact, if the results are expected, it does not qualify as a risk. Risk is uncertainty that a loss might
occur. Some losses of value, such as those resulting from wear and tear on a physical object, are
certain to occur eventually. These are not risks. Thus the risk that your suitcase will eventually
wear out is certainty and, therefore, is not insurable.
Insurable risks must also normally be accidental in nature and not intentional or deliberate. If
you intentionally damage your car, it is not risk. The loss need only be accidental from the
standpoint of the insured. (It could, for example, be intentionally caused by someone else, such
as a thief). When the loss is incurred due to your own deliberate actions, it cannot be covered by
insurance. If, for example, you have financial problems in your business and decide to set fire to
your business in order to get a cash payout from insurance, this will not get your claim.

2. The risk must be a 'pure' risk- ‘Speculative’ risks or ‘Trade’ risks cannot be insured against.
For example, loss of profits due to market fluctuations or increased taxation cannot be insured.
Insurers do not have sufficient knowledge of the various factors, which cause such losses and as
such they cannot assess the 'risk' involved and arrive at proper rates of premium. At any rate if
such risks are insured, insuring public would be tempted to fall back upon the insurance
protection rather than make efforts to avoid such losses. This would inhibit economic progress.

3. The risk must be calculable - The risk must permit a reasonable statistical estimate of the
chance of loss and possible variations from the estimate so that insurance company can work out
a premium to be charged. A risk is uninsurable when an insurance company cannot calculate the
probability of the risk and therefore cannot work out a premium that the business must pay. For
example, you cannot take out insurance against possible failure of your business because
insurance company cannot assess the 'risk' involved and arrive at proper rates of premium. Risk
may sometimes be unpredictable to an individual but be predictable in the aggregate and thus
become insurable for a group.

4. There must be a large group of homogeneous exposure units – There must be a large group
of homogeneous exposure units or in simple words there must be a "large number" of persons
with similar potential loss available so that overall, losses become predictable. To accumulate
adequate funds to pay losses, the insurance company must be able to predict losses. Accurate
predictions are possible only when there are sufficient numbers of homogeneous exposure units.
The law of large numbers applies here. To assist insurers in determining the correct degree of
risk and therefore level of premium insurers make use of this law. According to the law of large
numbers greater the number we observe, more accurately results can be predicted.

5. The risk must not be of a catastrophic nature- When arising out of the risk the loss happens
to a large number of persons at the same time, it is called catastrophic risk. Examples are war,
earthquake, terrorism etc. Losses or damages caused by these catastrophic risks are so extensive
as to be beyond the capacity of commercial insurance. Hence catastrophic risks are usually
uninsurable. However insurance is available for those catastrophic risks where the losses are
capable of being borne by the insurers.

6. The risk must not be of an "illegal" nature - The object of the contract must be legal.
Smuggling is an illegal act and as such insurance is not available for the goods which are being
smuggled. Intentional self-injury and suicide are criminal acts. Hence death or disablement
caused by these acts is not covered under personal accident insurance.

7. Insurance must not be against public policy -The term 'public policy' may be broadly
described as a set of moral and social principles or rules of conduct which have to be observed in
a healthy, well ordered society. For being insured the risk should not be against public policy.
Whereas, motor insurance is available to cover legal liability for loss or damage caused to the
third party in an accident, insured's liability to pay fines imposed for traffic offences is not
insurable.
It should be borne in mind though that above characteristics of insurability merely represents the
desirable characteristics of an insured risk. Indeed, most of the risks that are actually insured,
whether operational in nature or not, do not possess all of these characteristics. In fact, insurance
companies are very skillful at dealing with the insurability challenges that some risks present.
For example, a few years ago it would have been difficult to obtain a liability insurance of $50
million, yet now $750 million of cover is readily available.

8 Economically feasible premiums

Premium which is charged for the insurance should be affordable by insuring public. Premium
must be substantially less than the face value of the policy

Classes of insurable and uninsurable risks

Based on above requirements most of personal, property and liability risks can be insured.
Market risks, financial risks, production risks and political risks are difficult to insure. These
risks are generally uninsurable for following reasons:
 Many of these risks are speculative risks, which are difficult to insure privately.
 The potential for a catastrophic loss is great; this is particularly true for political risks,
such as the risk of war.
 Calculation of the proper premium may be difficult because the chance of loss cannot be
accurately estimated.