What Is an Insurable Risk?

You take out insurance policies on the things you care about most to protect them and your assets. These range from major purchases like homes and cars right down to your livelihood and health. But, unfortunately, no single insurance policy can guard against every possible risk in its category.

It's important to understand which risks are classified as insurable and which aren't. An independent insurance agent can also help by setting you up with the insurance policy you need and further explaining which risks it covers. But before then, here's a deep dive into how insurance companies define insurable risks. 

What Is an Insurable Risk?

Insurable risks match the criteria defined by insurance companies as a type of loss that can be covered by a policy. Risks considered insurable are listed on an insurance policy, such as car insurance, as disasters that the policy defines as covered losses or those that are eligible for reimbursement. Other disasters that are excluded by the policy, or not covered, are uninsurable risks.

What Makes a Risk Insurable?

Insurance companies have created four major categories to determine if a risk is insurable or not. If a risk meets these criteria, it gets listed on the policy as a type of covered loss that the insurance company has agreed to pay for up to the limits in the policy. 

Some examples of insurable risks under homeowners insurance include:

• Property damage risks: Including damage to the home's structure or dwelling and its contents by listed perils like fire, lightning, theft, vandalism, etc.
• Liability risks: Including personal liability costs related to lawsuits filed against you by guests or other third parties for claims of bodily injury or personal property damage caused by you or your property.
• Loss of use risks: Including additional living expenses related to having to stay somewhere else temporarily while awaiting repairs to the home after a covered loss.

An independent insurance agent can help you review any of your existing insurance policies and identify their complete list of insurable risks.

What Makes a Risk Uninsurable?

Uninsurable risks do not meet the criteria for an insurable risk as defined by insurance companies. Uninsurable risks can be considered too much of a risk or an uncertain risk that could cause a huge loss to the insurance company. 

Examples of uninsurable risks:

• Natural flood damage for properties located in flood zones or areas frequently hit by hurricanes
• Illegal activities of any kind, which insurance is not allowed to cover by law
• Wildfire damage to properties located in areas prone to these disasters

No matter what kind of insurance you buy, it's not going to be able to cover every type of risk. Before purchasing any type of policy, be sure to fully review it with your independent insurance agent to understand which risks are considered uninsurable.

The Four Elements of Insurable Risks

Insurance companies have designated four categories to define insurable risks. When a risk meets each of the criteria, it can be covered by an insurance policy.

Insurable risks are:

1. Not catastrophic: An insurance company must believe that a risk won't cause them catastrophic loss if they agree to cover it, and must be "reasonable." A catastrophic risk could include offering flood coverage for a property located in a flood zone.
2. Predictable: Insurance companies take on risks that are predictable so that they can accurately offer coverage at a premium rate that keeps them profitable. Using complex math formulas, insurance companies determine the predictability, or likelihood, that a certain risk will happen. The higher the likelihood of a predictable risk, the more expensive the coverage for it will be.
3. Random or "chance": Insurance policies tend to always exclude malicious or intentional acts. To be covered by insurance, a loss must be considered unintentional and random, or have occurred by chance.
4. Defined and measurable: Risks must also be "determinable and measurable" to be covered by insurance. The cause of the loss, the time and place it occurred, and the amount of the loss all must be able to be pinpointed or defined and able to be measured or quantified.

Knowing the four elements of an insurable risk can help you better understand your insurance policy. If you're still unsure of how any of these categories apply to your coverage, your independent insurance agent can explain further. 

Pure Risks vs. Speculative Risks

Pure risks, or event risks, are defined by insurance companies as uncertain situations with an opportunity for a monetary loss, and zero opportunity for a financial gain. Pure risks are the only type covered by insurance. Speculative risks, on the other hand, or those that can produce a monetary gain or loss (e.g., gambling), aren't typically covered by insurance.

Pure risks can range from natural disasters like hurricanes to other perils like vandalism, fire, or car accidents. These risks are insurable, and your insurance company can reimburse you for losses related to them. To be sure of which pure risks are covered by your insurance policy, review it with the help of your independent insurance agent.

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How Uninsurable Risks Can Affect Your Coverage Approval Odds

If an insurance company has determined that a risk is uninsurable and poses too great a threat of major loss to them, you're unlikely to be able to get coverage for it. Some real-life examples can include:

An independent insurance agent can provide you with even more real-life examples of uninsurable risks. Also, for all the insurable risks, they can help you find the appropriate policy to protect you.

Why Choose an Independent Insurance Agent?

Independent insurance agents simplify the process by shopping and comparing insurance quotes for you. They have access to multiple insurance companies, ultimately finding you the best coverage, accessibility, and competitive pricing while working for you. And down the road, your agent will still be there to help you file insurance claims and update your coverage when necessary.