Characteristics of an Insurable Risk Dr Asmaa Mohamed

Characteristics of an Insurable Risk Dr. Asmaa Mohamed Wahba

Characteristics of an Insurable Risk From the point of view of insurance companies, private insurers only insure pure risks but not all pure risks are insurable. A pure risk ideally should have certain characteristics to be insurable. 1. Uncertainty. 2. Large number of exposure units. 3. Loss must be accidental and unintentional. 4. Loss must be determinable and measurable. 5. Loss should not be catastrophic. 6. Chance of loss must be calculable. Slide 2 from 10

1. Uncertainty Ø It is means that the loss is likely to be "neither certain nor impossible“, This is because uncertainty is the basic element of the concept of risk from insurance point of view. Ø Note: although the risk of death is inevitable to occur, but the element of confirmation here is the timing of the death. That is, the risk is likely to occur at any time and not certain to occur at a certain moment. Slide 3 from 10

Uncertainty (continued) Ø That is, if the risk is certain to occur , the insurance company will not insure against this risk, and if the risk is impossible to occur , the individual will not insure the risk and will not bear the cost for insurance. Ø Therefore, the uncertainty is linked to another condition, namely, that the risk is likely to occur in the future. Of course there is no insurance for a risk that has already occurred. Slide 4 from 10

2. Large Number of Exposure Units Ø Exposure units means: People or property, that may be subject to a loss that can be given a cash value. Ø It should be a large number of similar but not necessarily identical exposure units that are subjected to the same peril or group of perils. Ø law of large number is an important requirement for accurate prediction of losses. Ø Example: Large number of cars in a city can be insured through property insurance on cars. Slide 5 from 10

3. Accidental and Unintentional Loss Ø The loss should be unintentional and unexpected by the insured and outside the insured‘s control. Ø If the cause of loss is intentionally, the insurer does not pay for the loss. Slide 6 from 10

4. Determinable and Measurable Loss Ø The loss should be both determinable and measurable not only in terms of value but also in terms of time, place. Ø The basic objective of this requirement is to enable an insurer to determine if the loss is covered with insurance, and if it is covered, how much should be paid. Slide 7 from 10

5. No Catastrophic Loss ØA enormous number of exposure units should not incur losses at the same time (simultaneously), meaning that the loss should not be catastrophic. Ø The purpose of this condition is that insurance depends on the idea that the losses of the few are spread over the entire group. Slide 8 from 10

6. Calculable Chance of Loss Ø Chance of loss should be calculable. i. e. The average severity and average frequency of future losses must be calculable by the insurer. Ø The basic objective of this requirement is to enable the insured to determine the appropriate insurance premium, to pay all claims and expenses and gain profit during the policy period. Slide 9 from 10

Is Risk of Automobile Accident is an Insurable Risk? Characteristics Availability of the characteristic Yes, the Loss is potential. 1. Uncertainty. 2. Large number of exposure Yes, There a large number of car owners exposed to automobile accidents. units. 3. Loss must be accidental and Yes in Normal case, automobile accident is accidental and unintentional. 4. Loss must be determinable Yes, the details about the loss can be determined and measured in terms of value, time, an place. and measurable. 5. Loss should not be Yes, all exposure units do not have accident at the same time. catastrophic. 6. Calculable Chance of Loss Yes, the loss frequency and loss severity can be estimated. Slide 10 from 10