Question

Discuss 5 salient elements of insurable risk                                                              

Answer 1

The 5 salient elements of Insurable Risk are discussed below:

1. DUE TO CHANCE

The loss must be 'due to chance'. This means that the loss must me accidental and not intentional. The insurers pay only for those claims that have occured due to chance. For example, An insured property that has accidentally caught fire will be considered insurable. If the insured has on purpose set the property on fire, the property loss can not be claimed.

2. DEFINITE AND MEASURABLE

The loss must be measurable, which means the insured must be able to identify the amount of loss and measure it. If the loss is not well defined or measurable, then it cannot be insured.

3. STATISTICALLY PREDICTABLE

The insurance providers must be able to estimate the statistics or loss that is, the occurence and severity of loss and how frequently it occurs in order to determine the premium rates. For this Insurance companies use tools like actuarial science and mortality tables.

4. NOT CATASTROPHIC

The insurance providers do not guard completely against a Catastrophic event. A catastrophic event is the event that involves a huge amount of loss and are unexpected events in a sense that they are not statistically predictable like floods, hurricanes or any other natural calamities. Therefore, the insurers only pay for the claims upto the extent specified in the insurance contract.

5. RANDOM SELECTION AND LARGE EXPOSURE TO LOSS

The insurance companies work under the principle of 'Law of large numbers'. This means that there must be large groups that should be exposed to the same event. This makes the statistical prediction regarding the loss associated with the event easier. Also, the policy holders must be large enough for the random selection so that only the risk prone section of the population is not included.