Features of insurance risks
There are various types of risks related with insurance. Risk is the degree of variation in the possible outcomes from an uncertain event or as the variation in actual from expected outcomes. We know that all risks are not insurable. There is no hard and fast rule to determine whether as risk is insurable or not. The following features are present in any risk which is insurable.
- Insurable interest: Risk can be insured if it has insurable interest in its object or person’s life
- The likelihood of loss should be predictable. Insurance companies know approximately how many fires will occur each year, how many people of a certain age will die, how many burglaries will occur, and how many traffic accidents and job-related injuries will take place. Knowledge of the numbers of such losses and of their average size allows the insurance company to determine the amount of premiums necessary to repay those companies and individuals who suffer losses.
- The loss should be financially measurable. In order to determine the amount of premium income necessary to cover the costs of losses, the dollar amount of losses must be known. For this reason, life insurance policies are purchased in specific rupee amounts, which eliminate the problem of determining the value of a person’s life. Many health insurance policies list the rupee value for specific medical procedures. Some policies have no schedule of benefits for such procedures but pay, say, 80 or 100 percent of the cost.
- The loss should be fortuitous or accidental. Losses must happen by chance and must not be intended by the insured. The insurance company is not required to pay for damages caused by a fire if the insured is found guilty of arson. Similarly, life insurance policies typically exclude the payment of proceeds if the insured commits suicide in the first year of the policy’s coverage.
- The risk should be spread over a wide geographic area. An insurance company that concentrates its coverage in one geographic area risks the possibility of a major catastrophe affecting most of its policyholders. A major hurricane, earthquake, or tornado might bankrupt the company.
- The insurance company has the right to set standards for accepting risks. The company may refuse insurance coverage to individuals with heart disease or to those in dangerous occupations, such as fire fighters, test pilots, and crop dusters. Or the company may choose to insure these people at considerably higher rates due to the greater risks involved. In the same manner, fire insurance rates may be different for residences and commercial buildings.
- Pure and major risks: Risk is said to be pure when it is casual, uncertain and non-speculative. Uncertain events which causes are insurable risks. The risk must be large amount of loss which cannot be borne by a single person.
- Monetary risks: Only monetary risks are insured. That means such risks are insurable which are capable of being compensated in monetary terms only.
- Objects of risks not to be illegal: Risks to be insurable must possess a valid or legal object. Loss on smugglers, thieves etc. are not insurable.
- Catastrophic: Some risks are catastrophic which affect large number of persons adversely. For example flood, earthquakes etc.
- Real risks: The insured risk must be real and not imaginary. Self-created or self-invited perils cannot be called as real risks. So these risks are not insurable.