|This article does not cite any references (sources). (October 2008)|
An insurable risk is a risk that meets the ideal criteria for efficient insurance. The concept of insurable risk underlies nearly all insurance decisions.
For a risk to be insurable, several things need to be true:
- The insurer must be able to charge a premium high enough to cover not only claims expenses, but also to cover the insurer's expenses. In other words, the risk cannot be catastrophic, or so large that no insurer could hope to pay for the loss.
- The nature of the loss must be definite and financially measurable. That is, there should not be room for argument as to whether or not payment is due, nor as to what amount the payment should be.
- The loss should be random in nature, else the insured may engage in adverse selection (antiselection).
Insurance is not effective for risks that are not insurable risks. For example, risks that are too large cannot be insured, or the premiums would be so high as to make purchasing the insurance infeasible. Also, risks that are not measurable, if insured, will be difficult if not impossible for the insurer to quantify, and thus they cannot charge the correct premium. They will need to charge a conservatively high premium in order to mitigate the risk of paying too large a claim. The premium will thus be higher than ideal, and inefficient. Passing of risk involves both party to the contract. The general rule is that unless otherwise agreed, risk passes with title. An agreement to the contrary may be either expressed or implied.
EXCEPTIONS TO THE GENERAL RULE: (A) RISK INCIDENTAL TO TRANSIT: The law provided that where the seller undertakes to make delivery of the goods to the buyer, risk attendant to the system of transportation or voyage contemplated will be borne by the buyer unless the parties agreed to the contrary. This is referred to as insurable risk. (B) RISK ATTRIBUTABLE TO FAULT OF EITHER PARTY: Any damage or loss which arises as a result of the fault or neglect of the seller or the buyer or their respective agents as the case may be shall be borne by that party at fault. (C) GOODS PERISHING: Goods perish not only when they cease to exist physically but also when they cease to exist in a commercial sense, e.g. fresh milk gone sour.
|This economics-related article is a stub. You can help Wikipedia by expanding it.|