Requirements Of Insurable Risk

Definition of "Requirements of insurable risk"

Terry Laughlin Terry Laughlin

1. a large number of homogeneous exposures (in order for the deviation of actual losses from expected losses to approach zero, and thecreditability of the prediction to approach one).
2. loss must be definite in time and amount.
3. loss must be fortuitous. An insured cannot cause the loss to happen; it must be due to chance.
4. must not be an exposure to catastrophic loss; risks must be spread over a large geographical area to prevent their concentration, REINSURANCE often is used to spread potentially catastrophic risks.
5. premium must be reasonable in relation to the potential loss. In theory, one could even insure against a pencil point breaking, butthe premium would be much greater than any possible loss.

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