When we talk of insurance, we are referring to risks in all forms. Hence, having for an insurance policy is just a way of sharing our risks with other people with similar risks.
However, while some risks can be insured (i.e. insurable risks), some cannot be insured according to their nature (i.e. non-insurable risks).
Insurable risks are the type of risks in which the insurer makes provision for or insures against because it is possible to collect, calculate and estimate the likely future losses. Insurable risks have previous statistics which are used as a basis for estimating the premium. It holds out the prospect of loss but not gain. The risks can be forecast and measured e.g. motor insurance, marine insurance, life insurance etc.
This type of risk is the one in which the chance of occurrence can be deduced, from the available information on the frequency of similar past occurrence. Examples of what an insurable risk is as explained:
Example1: The probability (or chance) that a certain vehicle will be involved in an accident in year 2011 (out of the total vehicle insured that year 2011) can be determined from the number of vehicles that were involved in accidents in each of some previous years (out of the total vehicle insured those years).
Example2: The probability (or chance) that a man (or woman) of a certain age will die in the ensuring year can be estimated by the fraction of people of that age that died in each of some previous years.
Non-insurable risks are type of risks which the insurer is not ready to insure against simply because the likely future losses cannot be estimated and calculated. It holds the prospect of gain as well as loss. The risk cannot be forecast and measured.
Example1: The chance that the demand for a commodity will fall next year due to a change in consumers’ taste will be difficult to estimate as previous statistics needed for it may not be available.
Example 2: The chance that a present production technique will become obsolete or out-of-date by next year as a result of technological advancement.
Other examples of non-insurable risks are:
1. Acts of God: All risks involving natural disasters referred to as acts of Go
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