What Is an Insurable Risk?

G. Wiesen

An insurable risk refers to a potential situation in which an insurance company evaluates the risk and determines insurability. This typically requires that the risk have a few basic elements, including the fact that the risk must be random or due to chance and not something someone can control. The potential loss for an insurable risk also must be something predictable and it must be measurable so that it can be proven in a definite way. In order for a risk to be insurable, it is also important that an insurer be able to charge enough for premiums covering it to pay for loss that may result from a claim being filed.

Man climbing a rope
Man climbing a rope

The idea of an insurable risk is the basic concept behind all of insurance. Insurance is typically offered by a company, called the insurer, for payments of a fee called a premium. These payments are intended as fairly small fees, which over time can add up to a significant amount. The total value of the premiums is meant to compensate the insurer and provide enough funding to cover potential costs if an insurance claim is filed by the insured.

A few different qualifiers are used to determine an insurable risk. One of the most important elements is that an event has to be random in order for it to be insurable. This means that potential risks should be caused by chance or events beyond the control of someone covered by insurance. An insurable risk needs to be something that the insured party cannot make happen in order to file a claim, otherwise the insurance is not sustainable.

It is also important that an insurable risk be something that is fairly predictable and provable. This means that an event should be something that has an established probability of occurrence, which allows the insurer to set appropriate premium amounts for the risk. An insurable risk also has to be provable in a definite way. This ensures that an insurer can verify that an event occurred that caused a loss, rather than relying upon vague or unsupportable claims.

An insurable risk is also typically one that can have a premium that ultimately pays for itself. This means that such a risk cannot result in a “catastrophic” loss that would require payment so great the insurer could not possibly cover it. Major events such as war or a nuclear attack are not typically covered by insurance policies, because the payments needed to insure such an event are too great. It would not be possible for an insurer to set reasonable premiums for such a severe potential risk.

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