In insurance theory and practice, the insurability of risks is constrained by a number of conditions. These conditions are critical for insurers because they have a direct impact on whether insurers are able to accurately assess risk, price it reasonably, and manage risk effectively.
In China, the conditions for insurable risks mainly include the following six aspects:
The first condition for an insurable risk is that the risk must be uncertain. This means that the occurrence of risk must be accidental and unpredictable. If the risk is certain to occur, then it is not an insurable risk. The essence of insurance is to disperse and transfer individual risks by pooling a large number of homogeneous risks, so the uncertainty of risk is the basis of insurable risks.
Pure risk refers to the risk that there is only the possibility of loss and no chance of profit. Corresponding to pure risk is speculative risk, i.e., the risk of both the possibility of loss and the opportunity to make a profit. Insurance only covers pure risk because the purpose of an insurance company is to transfer and spread risk by providing financial security and not to engage in speculative activities.
Substantial quantity and homogeneity are two other important conditions for insurable risks. Mass means that the risk must be large and universal, so that the probability of risk occurrence and the degree of loss can be accurately determined through the law of large numbers. Homogeneity requires that risks must be similar in nature in order to effectively aggregate and diversify and transfer.
The purpose of insurance is to provide financial security to the insured, therefore, the insurable risk must have the potential to cause significant losses. If the risk will result in only a minor loss, then the insured does not need to transfer this risk through insurance. The possibility of significant loss is an important feature of insurable risks and an important basis for insurance companies to determine coverage and pricing.
This condition requires that the risk must be diversified, i.e., the risk cannot cause most of the insured persons to suffer losses at the same time or place. If there is such a concentration of risk, then the insurance company will face significant pressure to pay out, and it may even lead to bankruptcy. Therefore, the diversification of risk is an important condition for insurable risk.
Measurability means that the probability of occurrence of risk and the degree of loss must be measurable. Insurers need to assess the size of the risk and determine the premium rate by making accurate measurements of the risk. If the risk is unmeasurable, then the insurer will not be able to accurately assess the risk and price it, which will increase the operational risk of the insurer.
In China, with the continuous development and improvement of the insurance market, the scope of insurable risks is also expanding. In addition to traditional property risks and personal risks, some emerging risks such as cyber security risks and environmental pollution risks have also been gradually included in the scope of insurance protection. The insurability assessment of these emerging risks also needs to follow the above conditions and be analyzed in the context of the actual situation.
In addition, it should be noted that different insurance companies may have different understandings and regulations on the conditions of insurable risks. Therefore, in practice, the insured needs to carefully read the insurance contract and insurance clauses to understand the specific insurance liabilities and exclusions to ensure that their risks are effectively protected.
In summary, the conditions for insurable risks include uncertainty, purity, substantial quantity and homogeneity, likelihood of significant losses, dispersion, and measurability of reality. Together, these conditions form the basic framework of insurable risks, which provides an important basis for risk management and the design of insurance products for insurance companies. With the continuous development and innovation of the insurance market, the conditions for insurable risks will also be continuously enriched and improved.
It is important to emphasize that insurance is an important risk management tool, but not all risks can be transferred and diversified through insurance. When choosing an insurance product, the insured needs to make rational analysis and decision-making according to their actual situation and needs to achieve the best risk management effect.
Of course, insurance companies should also continue to strengthen risk management and product innovation to provide more comprehensive, efficient and personalized insurance services for the insured.