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What is Insurable Risk?


What is Insurable Risk?

Insurance is a contract between two parties – the insurer and the insured.  Theinsurer undertakes to pay a certain amount to the insuredup on the happening of a certain loss causing event.  In exchange for this undertaking, the insured regularly pays an amount called premium to the insurer.

What is insurable risk?
A person or a business buysinsurance as protection against risk.  A person who wants to take insurance may want to pass on many kinds of risks to the insurer. But for a risk to be insurable, it has to meet certain criteria.  First of all, one needs to know what is insurable risk.

*.No ‘adverse selection’:

They should be a large number of people who have or are willing to take insurance for a particular risk.  If it is just a few peoplebuying insurance, then the insurer will suffer from the problem of ‘adverse selection’.  This means that only people who are most likely to face the risk will insure themselves and the insurance company will end up paying large amounts as claims settlement resulting in losses or reduction in profits.
*.Definiteness and measurability of loss
 For a risk to be insurable, the extent and amount of loss has to definite.  The insurer will refuse to issue a policy for a risk where the loss is vague and not measurable.  One should be able to clearly say that a loss of a particular amount has indeed taken place.

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