Are you familiar with the concept of insurable risk? Simply put, it refers to any potential loss or damage that an individual or organization can protect themselves against through insurance. But what exactly makes a risk insurable? In this post, we'll explore the building blocks of insurable risk and break down each element in detail. By understanding these key components, you'll be better equipped to navigate the complex world of insurance and make informed decisions about protecting your assets and managing potential risks. So let's dive in!
Introduction: What is Insurable Risk?
Insurable risk is defined as the chance of loss that can be covered by an insurance policy. To determine whether something is insurable, insurers consider four key factors: exposure, probability, fortuity and severity.
Exposure refers to the number of times a particular event could occur during the policy period. For example, if you have a home insurance policy, your exposure is one because your home can only sustain damage once during the policy period. If you have a business insurance policy, your exposure may be higher because your business could be damaged or destroyed multiple times.
Probability is the likelihood that an event will occur. Insurers use actuarial tables to calculate probability. These tables are based on historical data and take into account factors such as age, gender and location.
Fortuity is the element of chance or luck involved in an event occurring. An event that is certain to happen (such as death) is not considered fortuitous and is not insurable. Conversely, an event that may or may not happen (such as getting into a car accident) is considered fortuitous and is insurable.
Severity is the amount of damages paid out in the event of a loss. The severity of a loss can be measured in terms of money, time or property damage. The greater the severity, the higher the premium will be for coverage.
Element 1: The Peril – Define and explain the various types of perils that are typically covered by insurance policies.
There are three main types of perils typically covered by insurance policies: fire, wind, and water.
Fire: Fire is the most common type of peril covered by insurance policies. It can be caused by a variety of things, such as faulty wiring, careless smoking, or even natural disasters like lightning strikes. Wind: Wind is another common type of peril covered by insurance policies. It can be caused by things like hurricanes, tornadoes, or even severe thunderstorms. Water: Water is the third type of peril typically covered by insurance policies. It can be caused by things like floods, leaks, or even burst pipes.
Element 2: The Subject Matter – Discuss the different types of subject matter that can be insured and why they may need to be covered.
There are many different types of subject matter that can be insured, and the need for coverage may vary depending on the type of subject matter involved. For example, some common types of subject matter that can be insured include:
-Homes and other structures
Each type of subject matter may need to be covered for different reasons. For example, homes and other structures may need to be covered in case of damage or destruction by a natural disaster or fire. Vehicles may need to be covered in case of accidents or theft. Businesses may need to be covered in case of loss of income due to interruption of business operations. Personal property may need to be covered in case of theft or damage. Life insurance may be needed to provide financial protection for loved ones in the event of death.
Element 3: The Insured – Explain who qualifies as an insured and what criteria must be met in order to do so.
An insured is an individual or organization who buys insurance. In order to qualify as an insured, the individual or organization must meet certain criteria. Thecriteria vary depending on the type of insurance and the jurisdiction in which the insurance is bought. However, some common criteria that must be met in order to qualify as an insured include being a legal entity, having insurable interest in the subject matter of the insurance, and being able to demonstrate financial responsibility.
Element 4: The Insured Must Have an Interest in the Property or Activity Being Protected
The final element needed for an insurable risk is that the insured must have an interest in the property or activity being protected. This means that if something happens to the property or activity, the insured will suffer a financial loss. For example, if you own a home and it burns down, you have suffered a financial loss and would therefore have an insurable interest in the property. Similarly, if you are a business owner, you have an insurable interest in your business because if something were to happen to your business, you would suffer a financial loss.