Insurance is an agreement between the insured and the insurance company to cover the risk of loss and compensate the insured on occurrence of the risk of loss. Insurance is a common term in health, housing, conventional business and e-business, and other areas of human livelihood. It is a sector characterized by small, medium-sized, and large-scale consumers. Individuals and smallscale enterprises are the smallscale consumers. Organizations and companies are large-scale consumers of insurance services. It is a sector highly monitored and regulated by the state to protect insurers and the insured.
What Are the Requisites of Insurable Risk?
It is the acceptability of a client and the risks of loss to the insurer. Insurability is the basic scorecard insurers use to accept or reject an application for a policy cover. Even though insurability may be affected differently by insurers, there are some requisites that insurers universally rely on.
Requisites of insurability are the threshold of insurability that the policyholder in insurance agreement must meet.
Requisites of insurability exists because of dynamics insurance sector and business world at large.
For instance, an entity with insurable interest today could lose its insurable interest tomorrow. A person who thinks they do not need cover today could need it soon. Therefore, any insurer has to ensure that for any risk of loss covered, requisites are met. Six requisites of insurability are:
1. The event of loss must be fortuitous
The event that led to the suffered risk of loss must be by chance and not intentional. An insured will not be compensated if they were intentionally responsible for the risk of loss suffered.
2. Financial value
Subject matter to be insured must have a measurable financial value in case of risk of loss. The financial aspect applies differently in the case of property cover and life assurance.
For life assurance, the amount payable on the occurrence of risks of loss insured against is agreed upon when signing the contract. This is because no financial value can be attached to life. In case of an injury of an insured individual, the court can intervene and decide the amount of compensation payable to such party.
However, in the case of property, the value is certain and placed by the insurer and the insured, being in mind the conditions of the property being insured.
3. Pure risks
Insurance companies accept pure risks, and they avoid speculative risks as much as possible. Pure risks are accepted because they are beyond human control. A pure risk is a fortuitous event of loss to the insured.
An example of pure risk is a natural disaster like an earthquake that might damage a company’s premises.
Example of speculative risk is insuring unearned profits. Insurers will avoid such risks because the insured could fail to put in the hard work to earn profits because they are guaranteed of compensation.
4. Homogeneous exposure
Insurers will accept to cover the risk of loss because there are a sufficient number of similar risks. An insurance company takes advantage of pooling together premiums for homogeneous risks. Furthermore, an insurer can predict the extent of loss in case of risks of loss suffered.
This explains why companies selling premiums are more likely to accept to cover the risks they are knowledgeable about. However, there are still limited cases when insurance companies accept to cover heterogeneous risks exposures.
5. Particular risk
This is a risk that is suffered by one person and not by the entire community. For instance, fire is a risk of loss that will affect one person or entity. It is not a risk that the whole community will suffer.
However, fundamental risks are not insurable because they affect the entire community. For instance, inflation will not only affect the financial performance of one company but of the entire community.
Insurance companies accepts to cover particular risk if they can collect enough premium from many people and raise enough to compensate a few individuals who will be affected in case of the insured risk of loss.
6. Public policy
Before insuring a risk of loss, the risks of loss must be considered as ethical and even right in society. This is because insuring a risk of loss contrary to social morals will be unacceptable.
For instance, an insurance company cannot insure an individual who is in the business of selling illegal drugs or even insuring a killer.
What Is the Insurance Mechanism?
It is the concept of pooling together similar risk exposure to reduce the uncertainty surrounding the risks of loss in the entire economy.
The insurance mechanism is meant to distribute the compensation costs among people in the economy. It also cushions insured at different times when they suffer the risks of loss.
This concept works together with the law of large numbers and equitable premiums.
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- Life Assurance and Life Insurance Definition