Question

Discuss 2 of the 4 elements of an Insurable Risk (peril). Choose one of the 4 elements, and describe how, if it is missing, a manager might deal with that risk (peril).

Hint* 4 elements are

1.Large numbers of exposure units

2.Definite and measurable loss

3.The loss must be fortuitous, in other words, accidental and unintentional

4.The loss must not be catastrophic

Answer 1

1.Large numbers of exposure units :

The theory of insurance is based on the law of large numbers.

Hence the prime necessity for a risk to be insurable is that there must be enough amount of homogeneous exposures in order to combine losses that are reasonably predictable.

How to deal with that risk: Lost data can be compiled over time, and losses for the group as a whole can be predicted with some accuracy. The loss costs can then be spread over all insured’s in the underwriting class. Also, the probabilistic estimates used by the insurance company, by logic, assume a large number of units in a distribution and insurance products are priced accordingly.

2. Definite and measurable loss :

loss should be both measurable and predictable. This means the loss should be definite as to cause, time, place, and amount. Mostly life insurance policy meets this requirement.