Question

1. Discuss why speculative risks are not insurable. Select a product such as men's or women's clothing and talk about what would happen if the risks associated with product acceptability and profitability were insurable.
2. Each rainy season, the Zambezi river overflows its banks causing much ‘damage’. Discuss the cost to society of providing government assistance versus an individual’s responsibility for making bad choices. Have this discussion in light of the historic knowledge that rivers overflow their banks and towns next to rivers flood. Who pays?
3. Discuss whether the terrorism peril is insurable. Include a discussion of the definition of terrorism.
4. Suggest an insurance product that is currently not available in the Zambian insurance market. Discuss and select the form of organization that could "best" be used to deliver the product to the public. Make sure you consider cost efficiencies and the characteristics of the exposure.

Answer 1

1. Speculative risks are those that can result in three ways: gain, loss, no gain, no loss(even situation). Example of speculative risks is a stock investment and business startup. These risks cannot be insured Insurance companies run on the concept of spreading the risk among a large number of people, collect premium from them as a protection against the risk of loss and pay to a small number of people who actually bear the loss or face the risk they are paying the premium for. If in this process, the whole group undergoes loss and claims the recovery, insurance companies will run short of funds and will not be able to pay to anyone of them. In speculative risks, the likeliness of loss or failure is very high.

Taking example of products of insurable(pure) and non-insurable(speculative) risk- if a thousand people purchase car in a month and all of them get their cars insured, the probability of the cars getting damaged in accidents is very low, some tens or maximum hundreds for which the insurance companies can pay for the damage easily from the accumulated amount gained from the insurers. But if a thousand investors are investing their money in the stock, the probability of a large number of them or even all of them together facing a loss is very high. This will not let the insurance companies run with the concept through which they are sustaining their business. Hence speculative risks are uninsurable.

If the risks associated with the product's acceptability and profitability were insurable then the insurance companies would have to be paying huge amounts on business failures. The failure of acceptability of product or loss in business occurs due to many reasons. A product accepted by customers in a year may become obsolete and unacceptable the next year. These risks cannot be predicted or evaluated hence insuring them and paying for them would be a task next to impossible for insurance companies. There would also be more chances of fraud market practices. Businesses would not focus on forming marketing strategies for selling their product or satisfying their customers with a cushion of being paid for the losses if their product fails in the market.