All risks cannot be transferred to the
insurer. Mostly, pure risks can be transferred to the insurer. Now I am going
to discuss the characteristics of risks which can be transferred to the
insurer. The characteristics of the insurable risks are as follows:
1. The risk should be accidental or
random in nature. The loss causing factor should not be within the control of
the insured. Thus, the loss which has occurred already or which is very likely
to occur cannot be insured. For instance, a building which is on fire or which
is already destroyed by fire cannot be insured against fire. Similarly, a
person who is infected with AIDS disease cannot be insured because he is sure
to die as there is no treatment to AIDS
so far.
2. The amount of loss
should be measurable and possible to estimate. This condition is necessary to
set the premium at appropriate levels
3. There should be a
sufficiently large number of units exposed to the same risk. In other words,
there must be a large number of people interested to insure against the same
risk. This requirement follows from the law of large numbers, since an
insurance operation is safe only when the insurer is able to predict fairly
accurately its expected losses.
4. The units facing the same risk must
be spread over large geographical area.
In other words, the risk must be
spread over a wide geographical area so that the happening of a single event in
a small region may not cause heavy burden to the insurer. For instance, if an
insurance company had accepted against fire for the buildings located in one
area only, an incidence of fire in that area can destroy all those builds. The
insurance company may become bankrupt with that single incidence as it has to
pay to all the insured.
Therefore, it is
necessary that the values exposed to loss should not be concentrated in one
area.
Normally, pure risks
fulfill all the above four features and they are insurable.
There are certain risks which do not
fulfill these four requirements explained above, and cannot be insured against.
They are called non-insurable risks. These non-insurable risks include:
1. Risks due to war
(except cargo at sea) and certain risks such as radio activity arising from nuclear
fusion.
2. Risks incapable of measurement such
as unforeseen changes in fashion, marketing of new products, etc.
3. Risks too small and
recurring too frequently, or risks so large and recurring so infrequently. For
instance, a hotel cannot insure the crockery against breakages.