Dictionary of Insurance Terms: requirements of insurable risk
requirements of insurable risk
- a large number of homogeneous exposures (in order for the deviation of actual losses from expected losses to approach zeroand the creditability of the prediction to approach one).
- loss must be definite in time and amount.
- loss must be fortuitous. An insured cannot cause the loss to happen; it must be due to chance.
- must not be an exposure to catastrophic loss; risks must be spread over a large geographical area to prevent their concentration. reinsurance often is used to spread potentially catastrophic risks.
- premium must be reasonable in relation to the potential loss. In theory, one could even insure against a pencil point breaking, but the premium would be much greater than any possible loss.
