Nature of Insurable Risks Flashcards
What makes an Uninsurable risk?
For an uninsurable risk to occur, the situation or condition must fail to meet the requirements of an insurable risk such as a loss is inevitable or the damage is gradual.
List the characteristics of insurable risks
- Fortuitous
- Financial Value
- Insurable Interest
- Homogenous Exposures
- Pure Risks
- Particular Risks
- Public Policy
Explain what is Fortuitous in terms of Insurable Risks
The happening of the even is entirely accidental in nature (by chance). The frequency and severity of any risk must be beyond the control of the insured. Death is a certainty but the timing of the death would be fortuitous.
Explain what is Insurable Interest in terms of Insurable Risks
There is a legal relationship between the insured and the financial loss. This means that the person will stand to benefit from its preservation and will suffer from its loss.
To elaborate on this, a man is unable to claim fire insurance on his neighbour’s house that recently burned down. This is because there is no legal relationship between them and the man does not suffer the damage from the fire, only his neighbour does.
Explain what is Publicy Policy in terms of Insurable Risks
In the terms under Insurance, it would not be acceptable to insure against the risk of a criminal venture which is an act against the law.
Fines and penalties imposed by the government will not be covered by insurance even if the person has a financial relationship with the loss. It is against public policy for the elicit punishment to be transferred to the insurer.
Explain what is Financial Value in terms of Insurable Risks
The risk which is to be insured must result in a loss that is capable of being measured in financial terms.
Explain what is Homogeneous Exposures in terms of Insurable Risks
Insurers look for similar exposures to enjoy the benefit of the “law of large numbers” in order to forecast the expected extent of their loss.
What are the requirements of “The law of large numbers”?
- As the number of loss exposures increases the predicted loss tends to approach the actual loss.
a) the loss exposures must be independent.
b) there is a random or chance occurrence of a loss.
Explain what is Pure Risks in terms of Insurable Risks
Insurance is concerned mainly with pure risk and not speculative risk.
Pure risks involve the chance of loss or no loss whereas the probability of loss or gain or break even exists in speculative risks.
Explain what is Particular Risks in terms of Insurable Risks
It affects individuals whereas fundamental risks are widespread and indiscriminate in nature.
