Question

Briefly explain atleast 3 factors limiting the insurability of risks                             

Answer 1

3 Factors limiting the insurability of risks:

a) Premium loadings: If an insurance contract's premium equals the present value of expected claims costs, a risk averse person will likely demand full insurance coverage for monetary losses that otherwise would be paid by the person. because premiums almost always have a positive loadings, however risk averse person will demand, less than full coverage. As the loading increases, the quantity of coverage demand is likely to decrease. Thus any factor that increases administrative or capital loss will limit the amount of private market insurance coverage. Higher premium loadings generally implies less coverage.

b) Moral hazard: Effect of insurance on the insured's incentives to reduce expected losses.

• Expected losses must depend on the insurd's behaviour after having obtained insurance.
• It must be costly for the insurer to observe precautions by policyholders and measure their impact on claim costs.

c) Adverse Selection: Adverse selection occurs when consumers have different expected losses but the insurer is unable to distinguish between the types of insureds and charge them different premiums.It arises because it is too costly to classify insureds perfectly.