Question

Characteristics of insurable risks

Answer 1

Characteristics of Insurable risks are
1. The loss should be unintentional and by chance: The loss due to risk should be sudden, unforeseen and beyond the control of the buyer of insurance. Life insurance when a person is killed due to air crash which is beyond the control of the person.

2. Insurance can't cover catastrophic losses. For e.g. due to a hurricane if entire property is damaged over a large scale. The insurance company can't pay the entire amount as the premium is not sufficient to cover such a large loss. In such cases government steps in.

3. Risk should be quantifiable: For this insurance companies should use statistical methods to calculate probability of risk and loss due to that particular risk to calculate the premium required to cover for that loss.

4. Loss should be significant: Insurance is provided for cars, houses, equipment, etc. which have significant value. It is not provided to insignificant items like keys, clothes, etc.

5. Insurance can be given when large number of similar objects is there:
When large numbers of objects are there then insurance can be provided due to the premium collected for the insurance of all the objects.

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