Insurability
Insurability can mean eit her whet her a part icular t ype of loss (risk) can be insured in t heory,[1] or
whet her a part icular client is insurable for by a part icular company because of part icular
circumst ance and t he qualit y assigned by an insurance provider pert aining t o t he risk t hat a given
client would have.[2]
An individual wit h very low insurabilit y may be said t o be uninsurable, and an insurance company
will refuse t o issue a policy t o such an applicant .[3] For example, an individual wit h a t erminal
illness and a life expect ancy of 6 mont hs would be uninsurable for t erm life insurance. This is
because t he probabilit y is so high for t he individual t o die wit hin t he t erm of t he insurance, t hat
he/she would present far t oo high a liabilit y for t he insurance company. A similar, and
st ereot ypical, example would be eart hquake insurance in California.
Insurabilit y is somet imes an issue in case law of t ort s and cont ract s. It also comes up in issues
involving t ont ines and insurance fraud schemes. In real propert y law and real est at e, insurabilit y
of t it le means t he realt y is market able.
Characteristics of insurable risks
Risks t hat can be insured by privat e companies t ypically share seven common charact erist ics.[4]
1. Large number of similar exposure units. Since insurance operat es t hrough pooling
resources, t he majorit y of insurance policies are provided for individual members of large
classes, allowing insurers t o benefit from t he law of large numbers in which predict ed
losses are similar t o t he act ual losses. Except ions include Lloyd's of London, which is
famous for insuring t he life or healt h of act ors, act resses and sport s figures. However, all
exposures will have part icular differences, which may lead t o different rat es.
2. Definite Loss. The loss t akes place at a known t ime, in a known place, and from a known
cause. The classic example is deat h of an insured person on a life insurance policy. Fire,
aut omobile accident s, and worker injuries may all easily meet t his crit erion. Ot her t ypes of
losses may only be definit e in t heory. Occupat ional disease, for inst ance, may involve
prolonged exposure t o injurious condit ions where no specific t ime, place or cause is
ident ifiable. Ideally, t he t ime, place and cause of a loss should be clear enough t hat a
reasonable person, wit h sufficient informat ion, could object ively verify all t hree element s.
3. Accidental Loss. The event t hat const it ut es t he t rigger of a claim should be fort uit ous, or
at least out side t he cont rol of t he beneficiary of t he insurance. The loss should be ‘pure,’ in
t he sense t hat it result s from an event for which t here is only t he opport unit y for cost .
Event s t hat cont ain speculat ive element s, such as ordinary business risks, are generally not
considered insurable.
4. Large Loss. The size of t he loss must be meaningful from t he perspect ive of t he insured.
Insurance premiums need t o cover bot h t he expect ed cost of losses, plus t he cost of
issuing and administ ering t he policy, adjust ing losses, and supplying t he capit al needed t o
reasonably assure t hat t he insurer will be able t o pay claims. For small losses t hese lat t er
cost s may be several t imes t he size of t he expect ed cost of losses. There is lit t le point in
paying such cost s unless t he prot ect ion offered has real value t o a buyer.
5. Affordable Premium. If t he likelihood of an insured event is so high, or t he cost of t he
event so large, t hat t he result ing premium is large relat ive t o t he amount of prot ect ion
offered, it is not likely t hat anyone will buy insurance, even if on offer. Furt her, as t he
account ing profession formally recognizes in financial account ing st andards, t he premium
cannot be so large t hat t here is not a reasonable chance of a significant loss t o t he insurer.
If t here is no such chance of loss, t he t ransact ion may have t he form of insurance, but not
t he subst ance. (See t he U.S. Financial Account ing St andards Board st andard number 113)
6. Calculable Loss. There are t wo element s t hat must be at least est imable, if not formally
calculable: t he probabilit y of loss, and t he at t endant cost . Probabilit y of loss is generally an
empirical exercise, while cost has more t o do wit h t he abilit y of a reasonable person in
possession of a copy of t he insurance policy and a proof of loss associat ed wit h a claim
present ed under t hat policy t o make a reasonably definit e and object ive evaluat ion of t he
amount of t he loss recoverable as a result of t he claim.
7. Limited risk of catastrophically large losses. Insurable losses are ideally independent
and non-cat ast rophic, meaning t hat t he one losses do not happen all at once and individual
losses are not severe enough t o bankrupt t he insurer; insurers may prefer t o limit t heir
exposure t o a loss from a single event t o some small port ion of t heir capit al base, on t he
order of 5 percent . Capit al const rains insurers' abilit y t o sell eart hquake insurance as well as
wind insurance in hurricane zones. In t he U.S., flood risk is insured by t he federal government .
An inst ance where t he quest ion whet her insurabilit y exist s is cont est ed is t he case of
nanot echnology.[5] In commercial fire insurance it is possible t o find single propert ies whose
t ot al exposed value is well in excess of any individual insurer's capit al const raint . Such
propert ies are generally shared among several insurers, or are insured by a single insurer who
syndicat es t he risk int o t he reinsurance market .
Insurable interest
Insurable int erest refers t o t he right of propert y t o be insured. It may also mean t he int erest of a
beneficiary of a life insurance policy t o prove need for t he proceeds, called t he "insurable
int erest doct rine".[6]
For purposes of life insurance, close relat ives are assumed t o have an insurable int erest in t he
lives of t hose relat ives, but more dist ant relat ives, such as cousins and in-laws cannot buy
insurance of t he lives of ot hers relat ed by t hese connect ions. Thus, a married person has an
insurable int erest in t he life of t heir spouse, and minor children have an insurable int erest in t heir
parent s. A person is also presumed t o have an insurable int erest in his or her own life.[7][8]
In t he U.K. a person is considered t o have an unlimit ed int erest in t he life of t heir spouse, which
t he law considers broadly equivalent t o having an insurable int erest in t heir own life. Even if not
financially dependent on t he ot her, it is legit imat e t o insure against t he deat h of a spouse.[9]
Alt hough many insurers will accept policies of cohabit ing couples, t hey could pot ent ially be
invalidat ed. In recent years, t here have been moves t o pass clear st at ut ory provisions in t his
regard, which have not yet borne fruit .[10] Similar t reat ment was recent ly ext ended t o civil
part ners under sect ion 253 of t he Civil Part nership Act 2004.
Insurable int erest is no longer st rict ly an element of life insurance cont ract s under modern law,
for example wit h viat icat ion agreement s and charit able donat ions.[11] Oft en t here is no
requirement t oday t hat t he beneficiary have a proven insurable int erest in t he life of t he insured
when t he insured has purchased t he insurance.[8]
See also
Insurance law
References
1. Wiening, Eric A. (2002). Foundations of risk management and insurance (1st ed.). Malvern, Pa.:
American Institute for Chartered Property Casualty Underwriters/Insurance Institute of America. p. 6.3.
ISBN 9780894631009.
2. Vivian, R.W.; Darius, W.I. (2000). Risk behaviour and risk management in business life. Dordrecht:
Kluwer Academic Publishers. ISBN 9789048152827.
3. Jaffee, Dwight M.; Russell, Thomas (June 1997). "Catastrophe Insurance, Capital Markets, and
Uninsurable Risks". The Journal of Risk and Insurance. 64 (2): 205. doi:10.2307/253729 (https://doi.or
g/10.2307%2F253729) .
4. Mehr, Robert I. (1985). Principles of insurance (8th ed.). Homewood, Ill.: R.D. Irwin. p. 34–37.
ISBN 9780256030082.
5. Encyclopedia of Nanoscience and Society, edited by David H. Guston, Sage Publications, 2010; see
Articles on Insurance and Reinsurance.
6. Steuer, Anthony (2010). Questions and answers on life insurance : the life insurance toolbook (3rd ed.).
Alameda, CA: Life Insurance Sage Press. p. 151. ISBN 9780984508105.
7. Salzman, Gary I. (1965). "Insurable Interest in Life Insurance". Insurance Law Journal. 1965: 517.
8. Swisher, Peter N. (2004). "The Insurable Interest Requirement for Life Insurance: A Critical
Reassessment". Drake Law Review. 53: 477.
9. Griffiths v. Fleming [1909] 1 KB 805; Married Women's Property Act 1882, section 11.
10. Report on Family Law; Cohabitation, s. XVI (http://www.scottishexecutive.gov.uk/library2/doc11/rfl-1
2.asp)
Archived (https://web.archive.org/web/20070927222022/http://www.scottishexecutive.gov.uk/
library2/doc11/rfl-12.asp)
2007-09-27 at the Wayback Machine, Scottish Law Commission.
11. Nurnberg, Hugo; Lackey, Douglas P. (November 2010). "The Ethics of Life Insurance Settlements:
Investing in the Lives of Unrelated Individuals". Journal of Business Ethics. 96 (4): 513–534.
doi:10.1007/s10551-010-0480-7 (https://doi.org/10.1007%2Fs10551-010-0480-7) .
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