# Insurable and non-insurable risks

When we talk about insurance, we mean risks in all forms. Therefore, having an insurance policy is just a way of sharing our risks with other people with similar risks.

While some risks can be insured (ie insurable risks), some risks by their nature cannot be insured (ie uninsurable risks).

Insurable risks

Insurable risks are the type of risks for which the insurer reserves or insures itself because it is possible to collect, calculate and estimate the likely future losses. Insurable risks have previous statistics that are used as the basis for estimating the premium. It offers the prospect of loss, but not of profit. The risks can be predicted and measured e.g. car insurance, marine insurance, life insurance etc.

This type of risk is the risk whose probability of occurrence can be derived from available information about the frequency of similar events in the past. Examples of what constitutes an insurable risk, as explained:

Example 1: The probability (or chance) of a particular vehicle being involved in an accident in the year 2011 (out of the total insured vehicle in that year 2011) can be determined from the number of vehicles involved in an accident in each of the previous years ( of the total insured vehicle in those years).

Example2: The probability (or probability) that a man (or woman) of a given age will die in that year can be estimated by the number of people of that age who have died in each of the previous years.

Non-insurable risks

Uninsurable risks are types of risks against which the insurer is unwilling to insure simply because the likely future losses cannot be estimated and calculated. It holds out both profit and loss. The risk cannot be predicted and measured.

Example 1: The probability that demand for a commodity will fall next year due to a change in consumer tastes will be difficult to estimate, as the necessary statistics may not be available.

Example 2: The probability that a current production technique will become obsolete or obsolete next year as a result of technological progress.

Other examples of uninsurable risks are:

1. Action of God: All risks related to natural disasters called force majeure such as

a. Earthquake

b. War

c. Flood

It should be noted that any insured building, property or life lost in a Force Majeure Event (listed above) cannot be reimbursed by any insurer. Also, this uninsurability is extended to that related to radioactive contamination.

2. Gamble: You cannot guarantee your chances of losing a gambling game.

3. Loss of profit due to competition: You cannot guarantee your chances of winning or losing in a match.

4. New product launch: A manufacturer launching a new product cannot ensure the chances of acceptance of the new product as it has not been tested in the market.

5. Damage due to poor/inefficient management: The ability to successfully manage an organization depends on many factors and the profit/loss depends on the judicious use of these factors, including efficient management ability. The expected loss in an organization due to inefficiency cannot be insured.

6. Bad location of a company: Someone who establishes a business in a bad location should know that the chances of success are slim. Insuring such things is a surefire way to deceive an insurer.

7. Loss of profit due to drop in demand: The demand for a product varies with time and other factors. An insurer will never insure on the basis of expected damage due to a drop in demand.

8. Speculation: This is the involvement in a venture that offers the chance of significant profit but the possibility of loss. A typical example is the action or practice of investing in stocks, real estate, etc., with the hope of making a profit from an increase or decrease in market value, but with the possibility of loss. This cannot be insured as it is considered a non-insurable risk.

9. Opening of a new shop/office: The opening of a new store is considered a non-insurable risk. You don’t know what to expect in the operation of the new store; it is illogical for an insurer to want to insure a new shop for you.

10. Change in fashion: Fashion is a trend that cannot be predicted. Any expected change in fashion cannot be assured. A fashion house cannot be insured because the parts of the fashion house can become obsolete at any time.

11. Traffic Violations: You cannot take out insurance against expected fines for offenses committed on wheels.

However, it should be noted that there is no clear distinction between insurable and non-insurable risks. Theoretically, an insurance company should be willing to insure everything if a sufficiently high premium were paid. Nevertheless, the distinction is useful for practical purposes.