Uninsurable Risk

Uninsurable risk is a condition that poses unknowable or unacceptable risk of loss or a situation in which the insurance would be against the law. Insurance companies limit their losses by not taking on certain risks that are very likely to result in a loss. Many states offer insurance for otherwise uninsurable risks through their "high-risk pools." However, lifetime benefits may be capped and premiums may be expensive.

Uninsurable risks are those that would bring down an insurance pool, so they can't be taken on for regular coverage. The basic concept of insurance is that it spreads risk among a large group of people, so they can protect against a large loss by making a small insurance payment. For insurance to work, most of the group has to go without a loss. Otherwise, the insurance company runs out of money.

Risk is insurable when the risk is calculable, so an insurable risk is one in which there is either data which feeds statistics, or a known quantity that feeds probability. If a river floods 853 times in a millennium, that flood is an insurable risk. However, you can't insure against a person's business failing or a marriage failing. With so many factors, there's no way an actuary could reasonably calculate anything meaningful. That's the essence of uninsurable risk.

High-risk coverage is available from some insurance companies, and people with an uninsurable risks might be able to get some level of coverage this way, but coverage will likely be limited and premiums more expensive. Some governments offer insurance coverage when regular commercial insurance markets can't accept the risk. Government flood insurance, for instance, is available in high-risk areas because regular insurance companies won't write the policies.

Calling a risk uninsurable is not a simple conclusion to make. Some risks are clearly uninsurable because of the law, such as coverage for criminal fines and penalties. The law actually forbids such coverage. However, there isn't really a conclusive comprehensive list of all the uninsurable risks out there. Part of the job of corporate risk managers is to identify their organizational exposures as best they can and then work to manage or eliminate those risks. Sometimes, commercial insurance can be used to remove the bulk of that risk, but it's not always possible. While some coverage is available in some situations, there are five types of threats, which are mostly uninsurable: risk to reputation, regulatory risk, trade secret risk, political risk and pandemic risk.