Insurance and risk go hand in hand. Therefore it pays to understand not only these terms but insurance terms in general.
I believe everyone probably understands risk is defined as the uncertainty of financial loss. I believe this because otherwise no one would buy insurance. Given this is true, a person or thing must come under the umbrella of a term called insurable risk. Insurance companies consider these 6 factors when deciding insurable risk:
1. Chance of loss must be calculable by the insurer
2. Premiums must be affordable
3. Loss must be noncatastrophic
4. A large number of homogeneous exposures must exist
5. A loss must be accidental from the insured’s standpoint
6. A loss must be measurable as to amount and number
Let’s use automobile insurance as an example of insurable risk. If you take out one of the above 6 parameters, auto insurance probably wouldn’t exist. For example, having a vehicle totaled may be catastrophic (parameter 3) for some people in the insurance pool but overall it isn’t catastrophic to the population of insureds as a whole. Hence, it is insurable risk.
Being involved in a car wreck certainly would be accidental, unless staged and then it becomes fraud, and is always measurable as to amount and number. Some indureds could argue the premiums aren’t affordable but, in reality, they are or again auto insurance wouldn’t exist because nobody could afford to buy it.
The insurer has actuaries on staff who have calculated the chance of loss and computed a premium that will compensate the insurer should it face claims from its insureds. No matter the type of insurance, life – health – disability – long term care – worker’s comp, etc., these 6 parameters have to be met.
Whether a person knows they exist or cares they exist, doesn’t change the fact that they do exist and considered in every type of insurance. That is why almost anyone can walk into any insurance office and within a matter of minutes walk out with a policy.
These factors have already been studied by the insurance industry and translated into policies to cover the associated risk. The consumer at the retail end of the spectrum is spared the burden of having to do any research or computation in these areas before they can get the insurance they need.
As consumers, we may not like the premium we are quoted or the limitations and/or exlusions in a policy but we do have the luxury of shopping for the coverage we want. The requirement to understand insurable risk has already been done for us thereby easing our ability to acquire coverage.
by Carson E. Koziol
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Tags: actuaries, auto insurance, automobile insurance, car wreck, disability, insurance companies, insurance life, insurance office, insurance pool, insurance terms, insureds, insurer, life health, long term care, matter of minutes, parameters, premiums, risk insurance, standpoint, umbrella
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