Uninsurable Risk
What Does Uninsurable Risk Mean?
An uninsurable risk refers to a risk that insurance companies are unwilling to cover. This is typically because the likelihood of a loss is too high. For example, individuals with terminal illnesses are unable to purchase life insurance due to the certainty of a claim.
A risk may also be deemed uninsurable if it is too costly for the insurance company to cover. For instance, many homeowners’ insurance policies exclude flood damage as an insurable risk. This is because floods often affect numerous homes simultaneously, leading to losses that are too significant for insurance companies to manage.
Insuranceopedia Explains Uninsurable Risk
The concept behind insurance is to spread risk across a large group of people, allowing individuals to protect themselves against significant losses by making small insurance payments. This system works effectively only if most of the group remains free from losses; otherwise, the insurance company may run out of funds. Uninsurable risks are those that could jeopardize the stability of the insurance pool, which is why they cannot be covered under standard policies.
However, insurance companies do offer high-risk coverage. Individuals facing uninsurable risks may be able to obtain some coverage, but it will likely be limited and more expensive. Additionally, the government provides coverage for certain uninsurable risks, such as floods. In high-risk areas, the government offers flood insurance because it recognizes that private insurers are unwilling to cover such risks.
