What Does Non-insurable Risk Mean?
A non-insurable risk is a risk that the insurance company deems too hazardous or financially impractical to take on. These are typically risks that are commercially uninsurable, illegal for the insurance company to insure, or hold the potential for catastrophic loss.
Common examples include:
- Residential overland water.
- Earthquake.
- Nuclear hazard.
- Terrorist acts.
- War.
- Acts of a foreign enemy.
These are typical exclusions and some of this coverage is available for an additional premium or through a specialty insurer.
These types of risk are considered too high-risk for insurance companies to assume financial liability. This is because the frequency of these types of claims are very high or because there is the potential for a massive loss that would overwhelm the insurer’s ability to pay claims and remain financially stable.
The priority for insurance companies is to remain financially stable so they can remain in business and continue to meet their financial obligations to their clients and other stakeholders.
Regardless of the reason, insurers have determined that these risks are not profitable to insure and therefore they decline to offer that coverage.
Non-insurable risks are also sometimes referred to as uninsurable risks.
Insuranceopedia Explains Non-insurable Risk
The priority for insurance companies—aside from making money for shareholders—is to remain financially stable so they can meet their financial obligations to their insureds in terms of paying claims owed or returning unearned premiums. In order to meet that mandate, they will decline to offer coverage for certain risks that they deem to be unprofitable.
Insurance companies can consider a risk unprofitable for a variety of reasons but the most common 2 are:
High Probability of Loss – these are risks that come with frequent claims. Even if each claim is small, the sheer number of claims can really add up to a big sum for insurers. This is in addition to the administrative time and work required to process and adjudicate each claim as they arise.
Potential for Catastrophic Loss – this applies to non-insurable risks like war, nuclear hazards or even earthquakes. When one of these types of catastrophic losses occur, the amounts insurers could be liable for paying are so high that it would put them out of business or severely shake their financial stability.
Taking these 2 key factors into account, insurance companies will decline a risk because they know they will almost certainly lose money very quickly. In other words, assuming a risk with these 2 characteristics is bad business.
For example, a life insurance company may deem a person who is 80 years old and has lung cancer a non-insurable risk because the likelihood of their death before the policy becomes profitable is simply too high.
Sometimes, states provide certain types of insurance for non-insurable risks through "high-risk pools;" however, the premiums are often very high and provide very limited coverage.
FAQs
Noninsurable risk is a risk that cannot be measured actuarially or in which the chance of loss is so high that insurance cannot be written on it.
What is an example of an uninsurable risk? ›
An uninsurable risk could include a situation in which insurance is against the law, such as coverage for criminal penalties. An uninsurable risk can be an event that's too likely to occur, such as a hurricane or flood, in an area where those disasters are frequent.
What are the three main types of insurable risks? ›
Most pure risks can be divided into three categories: personal risks that affect the income-earning power of the insured person, property risks, and liability risks that cover losses resulting from social interactions.
Why am I uninsurable? ›
A track record of collisions, traffic violations, or DUI convictions can make getting coverage difficult and extremely costly. Insurers consider drivers with such records high-risk; some may deny coverage altogether. When companies do insure such drivers, they charge higher fees.
What is not a characteristic of insurable risk? ›
Final answer: The option that is NOT a characteristic of an insurable risk is A) 'The loss must be catastrophic'. Insurances are meant for non-catastrophic, financially damaging events that are unpredictable, measurable, and have a sufficiently large exposure pool.
What are the non insurable risk? ›
A risk that an insurer will not take on. For example, this may be where an event is inevitable (such as a terminally-ill person's death), gradual (such as rust or corrosion) or against the law.
What is an example of an uninsurable peril? ›
Example Of A Peril In Insurance
In a typical homeowners insurance policy, covered perils may include: fire, lightning, vandalism, theft, and hailstorms. Flood insurance-specific perils can include flash floods, storm surges, high tide, and stormwater runoff.
Which of these is not considered to be an element of an insurable risk? ›
Speculative risk has a chance of loss, profit, or a possibility that nothing happens. Gambling and investments are the most typical examples of speculative risk. The traditional insurance market does not consider speculative risks to be insurable.
What are the 6 requirements of insurable risk? ›
There are ideally six characteristics of an insurable risk:
- There must be a large number of exposure units.
- The loss must be accidental and unintentional.
- The loss must be determinable and measurable.
- The loss should not be catastrophic.
- The chance of loss must be calculable.
- The premium must be economically feasible.
Speculative risk is not insurable because it is always the result of the risk-taker's conscious choice. For example, a person who gambles at a casino, hoping to make some money, does so voluntarily and knowing that there is a high chance that they might lose their money.
They can include engaging in risky hobbies and behaviors like skydiving; having a history of DUIs or speeding tickets; having a dangerous job like roofing; having a criminal record or a less than ideal financial history; being a smoker; and failing a drug test.
Which occupations may be considered uninsurable? ›
10 High Risk Jobs That Can Make Getting Life Insurance Tough
- Fishing and hunting workers. ...
- Logging workers. ...
- Aircraft pilots and flight engineers. ...
- Roofers. ...
- Construction trades. ...
- Refuse and recyclable material collectors. ...
- Drivers (including for sales) and truck drivers. ...
- Structural iron and steel workers.
/ˌʌn.ɪnˈʃɔː.rə.bəl/ If someone or something is uninsurable, it is not possible to buy insurance (= an agreement in which you pay a company money and they pay your costs if something is lost or broken, if someone is ill, etc.)
Are all risks not insurable? ›
Some losses are simply impossible to value or too costly, too probable, or too susceptible to manipulation. These are known as uninsurable risks. For example, most errors and omissions insurance (E&O) policies won't cover you if a client sues you for not paying a bill or for stealing a customer or employee.
Is reputational risk uninsurable? ›
Reputational Risk
There may be some coverage (for product recall expenses, for example). But generally, these situations cannot be insured because an insurer cannot determine what the risk is and what it's worth.
What is the only type of risk that is insurable? ›
Insurers typically cover pure risks, which have no chance of a constructive outcome, and not speculative risks. A risk must meet specific criteria to be insurable, including being statistically predictable, common, random, and clearly defined with a measurable value.
What are uninsurable losses examples? ›
Some losses are simply impossible to value or too costly, too probable, or too susceptible to manipulation. These are known as uninsurable risks. For example, most errors and omissions insurance (E&O) policies won't cover you if a client sues you for not paying a bill or for stealing a customer or employee.
What is an example of an insured risk? ›
Insurance companies typically cover pure risks. Pure risks are risks that have no possibility of a positive outcome—something bad will happen or nothing at all will occur. The most common examples are key property damage risks, such as floods, fires, earthquakes, and hurricanes.
What is an example of an insurable pure risk? ›
Pure risks are insurable through commercial, personal or liability insurance policies. In these policies, individuals or organizations transfer part of the pure risk to the insurer. For example, home insurance policies protect against natural disasters by providing money for rebuilding.
What is an uninsurable peril? ›
What Is an Uninsurable Peril? Uninsurable perils are events for which insurance coverage is not available or for which insurers are unlikely to underwrite policies. An uninsurable peril is typically an event that has a high risk of occurrence, meaning the probability of a payout is high and expected.
