Uninsurable Peril

Uninsurable Peril are Events or situations that insurance coverage is not available for, or which insurance companies are unlikely to provide policies for. An uninsurable peril is typically something that has a high risk of occurrence, meaning that the probability of a payout by the insurance company is high and expected. Perils that are not covered are typically catastrophic in nature.

An example of an uninsurable peril would be if an individual builds a home in an area known for flooding. Since the area has a history of the particular peril (i.e. a flood) occurring, it is unlikely that an insurance company will want to extend flood coverage because of the difficulty in managing the potential risk. It's the reason why flood insurance exists as a national government program.

The major areas where insurance is unobtainable include reputational risk, regulatory risk, trade secret risk, political risk and pandemic risk.

Reputational risk occurs when a company does something, or something happens to a company, that damages its image and public favor to the point where its business is imperiled. For example, the CEO of a company is involved in a sexual harassment scandal, or someone is randomly placing poison in bottles of a company's product. There may be some coverage, for example, for product recall expenses, but generally these situations can't be insured because an insurer can't determine what the risk is and what it's worth.

Regulatory risk is the possibility that a government agency will do something, or a government will pass a law, that severely damages a business. For example, forcing coal-powered electric generators to close. Thousands of new rules and laws are posted at the state, local and federal level every year. It's impossible for an insurer to anticipate these or write a policy to mitigate the damage to a company stemming from them.

Trade secrets are essential to many companies, yet if they are exposed or stolen the damage is hard to calculate. A hacker cn steal key computer code, a disgruntled employee can walk off with secret formulas or processes. Predicting how likely this is to happen or the amount of damage is beyond the ability and scope of most insurers.

Political risks such as government expropriation of an asset, war or political violence, credit default of trade receivables, or when foreign governments block transfer of currency and assets, are difficult to insure against because they as so unpredictable. The same is true of pandemics. Mass sickness caused by flu or even Ebola can disrupt a business, but insurance can't help.