Question

Characteristics of an Insurable Risk

1) Large number of similar objects
2) Losses are accidental/unintentional
3) Losses can be determined/measured
4) Losses should not be catastrophic
5) Large Loss Principle
6) Insurable Interest

Insurance companies (or insurers) prefer their risks to have the six characteristics of Insurable risks. Can you think of any insurable risk that lacks any one of the characteristics? You can name the risk, loss exposure or peril and explain what characteristics this lacks.

Answer 1

1. Loss due to an earthquake lacks characteristic # 4: Losses should not be catastrophic.

2. Life insurance is an insurable risk. But it lacks characteristics 3 and 6. Firstly, how can the value of one's life be determined or measured? Is the insurable interest in one's own life not infinite?

Secondly, the insurance policy payout happens only on the death of the insured. But it is not for compensating the insurable interest of the deceased ( since the person is already dead), but that of the beneficiaries of the policy.