Risk is best defined as exposure to the chance of an event happening that creates loss or the degree of probability of such a loss occurring. This could be loss of life, injury, or financial loss. It’s neither predictable nor inevitable but is always a possibility.
Insurance risk is this possibility for loss that’s transferred from a person or organization (the insured) to an insurer, who underwrites the risk of loss. An insurance policy is issued to the insured which contracts with the insurer to pay a sum of money to the insured if a loss spelled out in the policy occurs. This sum is paid in order to compensate for the loss. Policy coverage is extended in exchange for an agreed-upon fee, or premium, paid to the insurer by the policyholder. The amount of premium charged depends on the amount of insurance risk determined to be present by you, the insurer’s underwriter.
Types of Insurance Risk
Since insurance risk concerns itself with the chance of something unexpected or harmful occurring and can include the loss or damage of assets or physical injury or death, the price of the policy covering potential losses must be carefully assessed. As an underwriter, you have a number of risk types to consider:
A risk where the monetary value of a particular loss can be measured. A loss assessment can be conducted and an accurate monetary value associated with the loss can be paid as compensation. An example is a vehicle that has suffered a specific amount of damage in a collision and requires repairs to bring it back to its pre-accident condition.
A risk where the monetary value of a loss cannot be measured. This risk cannot be insured. An example of non-financial risk is deciding to buy a vehicle that later proves to bring you discomfort or disliking. Since the risk of making the wrong decision to make this purchase cannot be measured monetarily, this is a non-insurable risk.
The risk associated with the occurrence of an event that could lead to a loss or a break-even condition. The occurrence of the event could not lead to a profit in any circumstance. These types of risk are both uncontrollable and insurable. They usually arise in association with some type of natural calamity such as a fire or storm.
A risk that, when undertaken, can result in either a gain or a loss. Because of the possibility for gain, this type of risk is usually not insurable. An example is buying a stock that has the potential of either going up or going down.
This is the risk that arises due to causes that are not under anyone’s control. They’re impersonal in both origin and consequence. The impact of these risks is generally felt by a large group such as an entire population. Examples of these types of risk include economic slowdowns or natural calamities which are insurable.
These risks arise because of some individuals or groups of these individuals, felt at a localized level. An example is an accident on a train or bus. These risks are insurable.
This risk remains constant over a period of time and is not affected by changes in a business’s environment. They are losses associated with a stable economy, generally due to unexpected natural events or destructive human behavior. An example is the embezzling of funds by an employee of the business. These risks are easy to measure and are generally insurable.
These risks arise when there are changes to the economy and are difficult to predict. An example includes changes in the income of individuals in an economy that affects their tastes and their preferences. These risks are not easily insurable.
Transfer of Insurance Risk
A risk that an individual or organization chooses not to bear alone can be transferred or passed on to another entity for a fee (premium). This is the basis of insurance. The one transferring the risk becomes the insured while the entity to whom to risk is transferred is the insurer. The insured pays an agreed-upon amount called the premium for the cost of the transfer.
In exchange for this premium amount, the insurer agrees to indemnify the insured against losses from perils specified in the insurance policy issued. Some of the most common policies held in the country include:
- Life insurance
- Vehicle insurance
- Homeowners’ insurance
Insurance inspectors are an important part of insurance issuance, especially regarding home insurance, where there exists so many potential risks and perils that can cause losses. As an underwriter, you could do no better than to have Insurance Risk Services working for you.