What is considered an insurable risk?

An insurable risk is one that can be calculated and pooled, making it viable for an insurance company to offer coverage. This means that the risk can be assessed in terms of likelihood and potential loss, allowing insurers to determine premiums and manage their overall risk exposure. By pooling many similar risks together, insurance companies can spread the potential costs of claims across a larger group of policyholders, making it financially feasible to cover losses.

Characteristics of insurable risks typically include being specific, measurable, and not subject to extreme unpredictability. This means the event or loss must be definable and possible to determine in terms of financial impact. Such risks include typical scenarios like auto accidents or property damage, where historical data can inform risk assessments.

In contrast, risks that are unpredictable and catastrophic can lead to substantial losses for insurers that cannot be evenly spread across a large group, making them less likely to be insurable. Guaranteed profits are contrary to the nature of insurance, which involves uncertainty; if profits were guaranteed, it would alter the fundamental risk-sharing principle of insurance. Finally, risks involving intentional acts typically fall outside the realm of insurable risks since they are preventable and often carry moral hazard issues, which insurers cannot effectively underwrite.