Introduction to General Insurance Underwriting

Subject Content

  • Introduction

    Risk and insurance

    In the context of insurance, risk generally refers to the possibility of an adverse outcome from a particular event.

    Insurance is based on the principle of transferring risks from an individual to a group in which many people (insureds) contribute small amounts (premiums) to a large fund. Insurers manage this large fund and pay claims to the few who incur any losses.

    While insurance essentially equates to risk transfer, this does not mean that all risks are able to be insured.

    Insurable risks

    Select the following underlined conditions a risk must meet in order for it to be insured to learn more:

    • The loss must be fortuitous
    • There must be adequate numbers
    • The chance of loss must be assessable

    Uninsurable risks

    Select the following underlined bullet conditions to learn more about why some types of risk are uninsurable:

    • Against the public interest
    • Beyond the capacity of insurers
  • The loss must be fortuitous

    Losses must be unexpected, accidental and by chance. A fortuitous loss that is expected to happen (or is intentionally brought about) is not suitable for insurance.

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  • There must be adequate numbers

    In a mathematical sense, a sample size must be suitably large for the law of averages to apply. In a practical insurance underwriting sense, the more examples of a risk that can be studied, the easier it is to accurately predict future losses. Such predictions enable insurers to calculate premiums appropriate to cover the overall losses of a portfolio of risk/s as well as the expenses of administering a fund.

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  • The chance of loss must be assessable

    For a risk to be insurable, it must be possible to calculate the likelihood of a loss occurring. If a potential loss is unquantifiable, (for example, when insufficient information is available for new or unusual risks), assessment may be impossible. When assessment is impossible, there can be no reliable basis for setting appropriate premiums and policy conditions.

    The quantifiable nature of a risk may also depend on if there is a chance of a pecuniary loss (a monetary value can be attributed to the risk).

    Read a brief, but thought-provoking case study about the potentially unassessable risks inherent in cultivating genetically modified crops.

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  • Case study: Cultivating genetically modified crops

    A risk may be considered unquantifiable if insurers cannot predict the possible long-term effects on individuals (or the community).

    For example, the New Zealand Government (Ministry for the Environment) have prohibited cultivating genetically modified crops, unless for research purposes, as they present unquantifiable risks at this time.

    As scientific understanding of the implications of such crops has grown, so too have the classifications of the risks being modified, and such bans have been lifted when it has been proved that no long-term risks exist.

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  • Against the public interest

    Insurance cannot be taken out against fines and penalties imposed by law. Insurances that are deemed against the public interest do not meet the criteria for insurability.

    For example:

    • an entrepreneur cannot take out property insurance on an illegal brothel
    • a driver cannot take out insurance against fines they may receive for a motoring offence
    • a professional cannot get cover against their own deliberate malpractice or fraud.

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  • Beyond the capacity of insurers

    When a significantly large population is subjected to a large risk, insurance of that risk may become unacceptable.

    For example, insurers do not have the capacity to bear the huge costs of the widespread destruction that can be caused by war, nuclear weapons or nuclear fallout.

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