When we talk about insurance, we mean risks in all their forms. Therefore, having an insurance policy is just a way of sharing our risks with others with similar risks.
However, while some risks can be insured (ie insurable risks), some are not insurable based on their nature (ie uninsurable risks).
insurable risks
Insurable risks are the types of risks that the insurer anticipates or insures against because probable future losses can be collected, calculated, and estimated. The insurable risks have previous statistics that are used as a basis for estimating the premium. It offers the possibility of loss but not gain. Risks can be forecast and measured, for example auto insurance, marine insurance, life insurance, etc.
This type of risk is one in which the probability of occurrence can be deduced from the information available on the frequency of similar past occurrences. Examples of what is an insurable risk as explained:
Example 1: The probability (or possibility) that a certain vehicle will be involved in an accident in the year 2011 (of the total number of vehicles insured that year 2011) can be determined from the number of vehicles that were involved in accidents in each of some previous years (of the total number of vehicles insured those years).
Example2: The probability (or chance) that a man (or woman) of a certain age will die in the insured year can be estimated by the fraction of people of that age who died in each of the previous years.
Uninsurable risks
Uninsurable risks are types of risks that the insurer is not ready to insure against simply because probable future losses cannot be estimated or calculated. It has the prospect of gain as well as loss. 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 taste will be difficult to estimate as the necessary prior statistics may not be available.
Example 2: The possibility that a current production technique will become obsolete or out of date by the next year as a result of technological advancement.
Other examples of uninsurable risks are:
1. Acts of God: All risks related to natural disasters called acts of God such as
A. earthquake
b. War
against flood
It should be noted that any building, property or life that is insured but lost during an Act of God (mentioned above) cannot be compensated by an insurer. In addition, this non-insurability is being extended to those related to radioactive contamination.
2. Game: You cannot insure 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 competition.
4. Launch of new product: A manufacturer launching a new product cannot ensure the chances of acceptability of the new product since it has not been tested in the market.
5. Loss incurred as a result of 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, one of which is efficient management ability. The expected loss in an organization as a result of inefficiency cannot be assured.
6. Bad location of a business: A person who places a business in a bad location must know that the probability of success is slim. Insuring such businesses is a surefire way to fool an insurer.
7. Lost profits as a result of the drop in demand: Demand for any product varies with time and other factors. An insurer will never insure based on the expected loss due to decreased demand.
8. Speculation: This is the commitment in a company that offers the possibility of a considerable profit but the possibility of a loss. A typical example is the action or practice of investing in stocks, property, etc., with the hope of gaining from a rise or fall in market value but with the possibility of a loss. This cannot be insured because it is considered an uninsurable risk.
9. Opening of a new store/office: The opening of a new store is considered an uninsurable risk. You don’t know what to expect in running the new store; it is illogical for an insurer to agree to insure you a new store.
10 fashion change: Fashion is a trend that cannot be predicted. Any expected changes in fashion cannot be assured. A fashion house cannot be insured because the components of the fashion house can become obsolete at any time.
eleven Traffic violations: You cannot obtain an insurance policy against the fines provided for violations committed on wheels.
However, it should be noted that there is no clear distinction between insurable and uninsurable risks. Theoretically, an insurance company should be ready to insure anything if a high enough premium is paid. Nevertheless, the distinction is useful for practical purposes.