Lesson 2 The Insurable vs Non insurable Risks

Lesson 2: The Insurable vs Non -insurable Risks 1

Introductory case: Boycott the Cosmetic Company In summer 2016, a French cosmetics company cancelled a concert organized for a Hong Kong singer for some sensitive reasons. The decision triggered massive sentiment against the company. More than twenty thousand people signed up online requesting the company to reconsider its decision. Also, the news was picked up by international media. As the company did not change its position many people called for boycott of the company’s product through social media. Question: Is it possible for the company to insure for such kind of risk? What would be the criteria for an insurance company to accept the offer? 2

Contents to be covered Insurable risk vs non-insurable risk 3 Criteria for insurability

Recall: 4 Speculative risk Usually cannot be insured Pure risk Insurable risk Noninsurable risk

Insurable vs Non-insurable Risk 5 The risk whether the insurance company will provide protection or offer cover for Yes Insurable risk e. g. fire, flooding No Non- insurable risk e. g. company profit, success of new product

Criteria for insurability 6 A. Purely by chance E. B. Loss should not be devastating Measurable loss Insurability D. C. Law of Large numbers Loss should be large

A. Purely by Chance Context Examples Yes Purely by chance, no control by the party of insurance, normally due to accident, no intentional action for taking advantage of the insurance, not sure it will or will not happen 7 Fire, flooding, employee injury, car damage etc due to accident No Factory breaking down due to lack of maintenance, failure in getting government license approval due to lack of preparation

B. Measurable loss 8 context Examples Yes The loss can be objectively measured in terms of money No Factory damaged by landslide, typhoon or machineries stolen Loss due to the leaking of company secret on its future development

C. Loss should be large Examples Context Yes The loss must be large in terms of monetary value 9 Factory on fire, severe car damage and loss of valuable stock No shoplifting in supermarket

D. Law of large numbers Examples Context Law of large numbers: similar event is faced by a large number of people or organizations so that enough information can be collected to forecast the likelihood and possible damages 10 Yes No Industrial accident, car collision, and probabilities of fire etc New disease that has not been identified before

E. Loss should not be devastating Context Examples Yes It is unlikely that all parties who have joined the insurance will be affected at the same time, and the occurrence of loss should be independent from each other Traffic accident, robbery No Nuclear war, widely-spread epidemic 11

Discussion Recall the introductory case on the cosmetics company Do you think the “loss on image” could be insured? 12

Summary 13 In fact, it is difficult to say definitely what is insurable and what is non-insurable Many new risks have been arising in recent years e. g. political risk, violence risk, internet hacking risk etc Many new insurance products have been rolled out as cover

Revisit the topics covered Another classification of risk • Insurable risk • Non-insurable risk Criteria for insurability • By chance • Measurable in terms of monetary value • Large loss • Law of large numbers • Loss should not be devastating 14