Jane Dotson
Insurance is designed to protect against the many risks of loss associated with running a business, but it has never been intended to cover everything. Insurers only pay out claims for loss events brought about through accidental means, and the loss must be definite and measurable. Pure risks, which have no possibility of a positive outcome, are typically covered by insurance companies, whereas speculative risks are almost never covered. An uninsurable risk could include a situation in which insurance is against the law, such as coverage for criminal penalties, or an event that is too likely to occur, such as a hurricane in a hurricane-prone area.
| Characteristics | Values |
|---|---|
| Insurable risks | Pure risks, such as property damage |
| Uninsurable risks | Criminal penalties, natural disasters in high-risk areas, business loss, war, pandemics, volatile investments, suicide within the first 1-2 years of a life insurance policy |
| Pure risks | Events with no possibility of a positive outcome |
| Speculative risks | Events with a chance of loss, profit, or a possibility that nothing happens |
| Insurable risks are | Calculable, measurable, predictable, and able to pool losses among many |
| Uninsurable risks are | Unpredictable, immeasurable, and uncontrollable |
| Insurable risks are | Random, not within the policyholder's control, and the policyholder cannot cause or influence the loss |
| Uninsurable risks are | Inevitable, intentional, and influenced by the policyholder |
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What You'll Learn
- Insurers won't cover events deemed too likely to occur, such as floods in flood zones
- Pure risks are insurable, but speculative risks like gambling are not
- Insurers will not cover criminal acts or intentional damage to property
- Insurance companies will not cover events that are too expensive, pervasive, or unpredictable
- Insurers will not cover business loss, war, pandemic, or volatile investments
Insurers won't cover events deemed too likely to occur, such as floods in flood zones
Insurers are in the business of making money, and insurance is a game of statistics. Insurers will not cover events that are deemed too likely to occur, such as floods in flood zones. This is because the occurrence of these events is considered calculable and can be measured and tracked by actuaries who study data and probabilities for insurance companies. If an event is too likely to occur, the insurance company will have to pay out too many claims, reducing the funds in the insurance pool.
For example, if a home is situated on the coast where there are frequent hurricanes and damage to properties, insurance companies might consider the risk of damage too likely to occur. As a result, the risk would be uninsurable, and insurance companies wouldn't provide any coverage caused by that particular event. Similarly, homes located in areas where there are frequent landslides or floods might also be considered uninsurable risks to insurance companies.
In the case of floods, most homeowners insurance does not cover flood damage. Flood insurance is a separate policy that can cover buildings, the contents of a building, or both. The National Flood Insurance Program (NFIP) is the nation's largest single-line insurance program, providing nearly $1.3 trillion in coverage against floods. In communities that participate in the NFIP, flood insurance is mandatory for properties located in high-risk flood zones if mortgages are government-backed.
It is important to note that the risk of flooding exists no matter where you live or work. Flood maps can help identify a community's flood zone, floodplain boundaries, and base flood elevation. While some areas may be designated as having a reduced risk of flooding, there is still a chance of flooding occurring. Therefore, it is crucial to consider the specific location and take appropriate measures to protect against flood damage, such as purchasing flood insurance or implementing mitigation strategies.
Overall, insurers will not cover events that are deemed too likely to occur, as it would result in frequent payouts and deplete the funds in the insurance pool. This includes situations where the risk of damage or loss is considered calculable and measurable, such as floods in flood zones.
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Pure risks are insurable, but speculative risks like gambling are not
Speculative risks, on the other hand, refer to price uncertainty and the potential for losses or gains in investments. Unlike pure risks, speculative risks are usually taken on as conscious choices rather than the result of uncontrollable circumstances. For example, when an individual gambles at a casino, they do so voluntarily, knowing there is a high chance of losing money. The casino, or "house", aims to enrich itself rather than its customers, the gamblers.
Insurance companies typically only indemnify against pure risks, also known as event risks, and rarely cover speculative risks. Pure risks embody most or all of the main elements of insurable risk, including "due to chance", definiteness and measurability, statistical predictability, lack of catastrophic exposure, random selection, and large loss exposure. For instance, insurance providers will cover pure risks such as property damage from a natural disaster. However, they will not insure against speculative risks like gambling or investing in the stock market, where there is a possibility of financial gain.
Furthermore, insuring against speculative risks could introduce a moral hazard, increasing an individual's tendency to take on riskier behaviour. For example, if an individual could purchase insurance against losses on sports betting, they would have little incentive to bet moderately or study team records to improve their odds. Similarly, insuring against speculative risks like bad investments would remove the distinction between blue-chip stocks and penny stocks, as individuals could invest in riskier assets without thorough research.
While insurance can help mitigate the financial impact of pure risks, speculative risks are generally not insurable due to their voluntary nature and the potential for financial gain. Understanding the difference between these types of risks is crucial for financial and insurance planning.
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Insurers will not cover criminal acts or intentional damage to property
Insurance companies will not cover criminal acts or intentional damage to property. This is because criminal acts are considered uninsurable risks, which are events that are too likely to occur or are unpredictable. Insurance companies require that risks be calculable and measurable, with statistical predictability, to provide coverage. Criminal acts, by nature, do not meet these criteria.
In the case of New York, insurance contracts may not be written to insure a person for their intentional criminal acts. This is based on public policy, which precludes indemnifying an insured person for intentionally inflicted injuries.
Additionally, intentional damage to property is often not covered by insurance companies. This is because insurance companies deter policyholders' claims that arise from intentional acts. They argue that the policyholder intended to cause the damage and, therefore, should not be covered.
However, there may be some exceptions to this. In some cases, insurance companies may provide coverage for libel, slander, malicious prosecution, and other types of intentional torts. These exceptions typically depend on the specific insurance policy and the state in which the policy was written.
It is important to note that insurance companies do not cover all risks. They typically only cover pure risks, or event risks, which are uncertain situations where there is an opportunity for loss but no financial gain. Speculative risks, such as business ventures or gambling transactions, are not usually covered as they lack the core elements of insurability.
Overall, it is clear that insurance companies will not cover criminal acts or intentional damage to property due to the unpredictable and intentional nature of these acts.
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Insurance companies will not cover events that are too expensive, pervasive, or unpredictable
A catastrophic risk is any severe loss that is deemed too expensive, pervasive, or unpredictable for an insurance company to reasonably cover. These risks often lack the core traits that insurance policies require, such as predictability, calculability, and the ability to pool losses among many. For example, insurance companies will not cover events that are too likely to occur, such as hurricanes or floods in areas where those disasters are frequent. These events are considered uninsurable because they do not meet the requirement of unpredictability.
Additionally, insurance companies will not cover events that are illegal or against the law. For example, any allegation related to a criminal act or intentional wrongdoing is generally uninsurable. This includes coverage for criminal penalties, such as criminal fines and penalties. Insurance companies will also not cover events that are considered inevitable, such as providing property insurance to a business when a wildfire is burning just miles away.
Furthermore, insurance companies typically only cover pure risks, which are risks that have no possibility of a positive outcome. Something bad will happen, or nothing at all will occur. Speculative risks, on the other hand, have a chance of loss, profit, or the possibility that nothing happens, and are therefore not typically covered by insurance companies. Examples of pure risks include natural events, such as fires or floods, or other accidents, such as automobile crashes or injuries.
It is important to note that each insurance company may have its own policies regarding what they consider insurable and uninsurable. Additionally, policyholders may choose to pay higher premiums for insurance with higher payout limits and/or lower deductibles. It is crucial to understand the specific benefits and exclusions of an insurance policy before purchasing it.
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Insurers will not cover business loss, war, pandemic, or volatile investments
Insurers will not cover certain risks due to their high likelihood of occurring, immeasurable impact, or uncontrollable nature. These risks often lack the core traits that insurance policies require: predictability, calculability, and the ability to pool losses among many.
Business losses, for example, are generally not covered by insurance companies. This includes losses caused by strategic failures or shifts in consumer demand, which are deemed preventable with good planning and therefore not accidental, measurable, or outside the business's control.
War and acts of war are also typically excluded from standard insurance coverage. These events are considered unpredictable and catastrophic, making them uninsurable under traditional risk models. While war risk insurance does exist, it is usually reserved for commercial fleets, defense vehicles, or entities operating in high-conflict zones, and is rarely practical for individuals.
Pandemics, such as the COVID-19 pandemic, are another example of a risk that insurers will not cover. The global nature and unpredictable frequency and scale of such events make them challenging to insure.
Additionally, volatile investments or speculative risks, such as gambling and investing, are almost never covered by insurance companies. These risks lack the core elements of insurability, including the absence of financial gain and the presence of uncertainty.
Insurers' decisions to exclude these risks from coverage are based on their high likelihood of occurrence, unpredictability, and potential for catastrophic loss. These factors make it difficult to calculate premiums and ensure that insurance funds remain available for policyholders.
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Frequently asked questions
An uninsurable risk is a risk that an insurance company will not cover due to its high likelihood of occurring, immeasurable impact, or uncontrollable nature. These risks often lack the core traits insurance requires: predictability, calculability, and the ability to pool losses among many.
Some examples of uninsurable risks include criminal penalties, natural disasters in high-risk areas, business losses, war, pandemics, and volatile investments.
Insurance companies need to turn a profit to survive, so they only cover risks that are insurable and allow them to yield a profit. Uninsurable risks are often too costly and unpredictable for insurance companies to reasonably cover.
If you have an uninsurable risk, you may need to explore alternative options such as annuities, different types of insurance policies, or risk management strategies to mitigate your exposure.
