What is the difference between insurance and non-insurance risk, what types of risks are, how insurance companies assess risks?
They say that whoever does not take risks does not drink champagne. But the risks are
different. Including insurance and non-insurance. If you understand what the term insurance risk means, you are more likely to get maximum coverage from insurance. After all, ignorance of the conditions to which you agree by concluding a contract does not exempt you from liability. Let’s see what lies behind the word insurance risk and why it is really important to carefully read the section of the contract that is associated with this concept.
Definition of insurance risk
Insurance risk is exactly the event from which the client of the insurance company wants to protect himself. This event, or several at once, is determined in advance in the contract. Upon occurrence, the policyholder is entitled to compensation for damage resulting from this risk. The risk may arise suddenly as a result of force majeure, phenomena, or actions of third parties.
The concept of insurance risk is disclosed in article 9 of the law of the Russian Federation “On the organization of insurance business in the Russian Federation”, which spells out the main rules for the organization of insurance services in Russia.
Possible insurance risk implies some kind of danger to life, health, rights, or property. And insurance protects against its consequences. Anything can happen in life, but sometimes it can be assumed that the probability is high. For example, apartment owners most often suffer from bays. It is a common phenomenon: flooding can you, and may you. Despite the fact that many people think that such troubles happen to anyone, but not to them, you cannot argue with the statistics of the most frequent insurance cases and we can safely assume that such a risk is possible. Once the policy has been issued, the insurance company is responsible for compensation, which will be paid if the risk materializes.
Types of risks
There are insurance and non-insurance risks (not included in the liability of the insurance company).
Insurance risks in general are included in the scope of insurance liability (events stipulated by the contract, as a result of damage from which the insurance payment is made) under the contract with the insurer. The price of risk has a monetary value, information on the calculation of the insured amount is always spelled out in the tariffs.
If you look from the angle of the objects of insurance protection themselves, then the risks are individual, when, for example, one person or one type of property is insured, and collective, when protection is issued for a group of people or for several objects at once.
Risks are also divided according to the principle of obligation :
- Voluntary, when a person, on his own initiative, wants to take out insurance ;
- Mandatory when the law requires you to issue a policy.
Also, risks can be classified by the nature of the occurrence. In particular, they are:
- Natural, depending on weather conditions (floods, hurricanes);
- Man-made, associated with the use of machines and mechanisms, with human intervention in the natural environment (groundwater, explosions in production).
- Risks associated with human activities (theft, vandalism).
An uninsured risk is a possible event that is an exception to the insurance contract. It may cause losses, but nevertheless, the client is not entitled to compensation.
To understand whether a certain risk belongs to the number of insurance risks, you need to answer the question of whether it falls under the following criteria:
- The likelihood that the risk will materialize should be high. It is definitely not possible to insure against abduction by the Martians, but it is important to remember the principle: it is definitely worth ensuring what will happen with a high probability;
- The risk must be random. Only what is hypothetically possible is subject to insurance, and not known in advance and inevitable (if a person saw that he was clearly dripping from the ceiling and ran to take out property insurance, then the risk of a gulf, in this case, is clearly not an accident);
- The occurrence of an insured event should not depend on anyone who is interested in it ;
- The insured event, with which the risk is associated, should not have a huge catastrophic scale, that is, it should be a rare occurrence with a high destructive capacity and large losses for many people. It is extremely difficult here to pay compensation to the victims, therefore, such risks are usually simply not included in the contract;
If the risk does not meet these criteria, then, most likely, it is not insured. But a lot depends on the rules of insurance and the details stipulated in a specific contract (some companies consider a hurricane or flood a non-insured event when insuring property, and some include it among the insurance risks).
Also, the insured risks, as a rule, include:
- Market risks are factors that can lead to loss of property or income. For example, when insuring entrepreneurs against losses and non-receipt of profits, these are risks such as seasonal or cyclical changes in prices, changes in fashion, an increase in offers from competitors;
- Political risks: change of government, war, restriction of free trade, increased tax burden;
- Production risks, as a rule, are not insured when it comes to unprofitable equipment, lack of resources, strikes, truancy, labor conflicts.
- Personal risks, which include the inability to find a job due to education that is not quoted in the labor market or poverty as a result of divorce.
How risks are assessed
Thanks to the calculations, the client can determine in advance the option of protection he needs, and insurers can analyze the situation and demand for certain services.
Risks can be assessed individually. For example, if an employee of an insurance company understands that the probability of an insured event is very high, then he may increase the amount of the insurance premium or refuse to issue a policy. And vice versa: if the responsible employee of the company considers that we are talking about an unlikely event, in some cases discounts are possible (again, if the risk is not included in the list of exceptions from the contract and is insurance).
Also, the assessment can be made based on average values. In fact, by means of mathematical calculations, using formulas, the probability of an insured event is predicted. For example, based on statistics of similar incidents, the frequency, and magnitude of damage in the past. Here the amount is calculated for each parameter that may affect the occurrence of an insured event. Based on the assessment results, specialists decide which tariff rate is optimal for a particular risk.
A percentage estimate is also possible. This method is based on a system of discounts and allowances, expressed as a percentage. The discount or increase to the size of the insurance premium depends on the available information about positive or negative deviations from the average values, which are taken into account by the insurer. For example, using this method, if it is known for sure that the client has taken measures to reduce the threat of adverse events, the policy will cost him less.
With the expert assessment method, a combination of different approaches is used to obtain the most accurate data on the probability of risk and to calculate the optimal amount of the insurance premium most accurately.
Naturally, the tariff may depend not only on how the insurer assessed the risks. The big picture is also important here. It is logical that if a person wants to protect himself from the maximum possible number of misfortunes and with the greatest insurance coverage, then the policy will cost him more than with a modest set of options. But this coin has two sides: after all, by protecting himself according to the maximum program in an appropriate size from many risks, the client can receive compensation, which, when an insured event occurs, will become a real help.
Vikas Sudan is the SEO Manager at whisskers marketing, an United States digital marketing agency. An expert in Digital Marketing and Blogging, He never misses an opportunity to spread the knowledge and share the industry’s best practices. Vikas Sudan is present on social media like Facebook, Instagram, LinkedIn, Pinterest & Twitter also.