Risk represents the potential to lose something of value, whether it is property, health, wealth, or other assets. Businesses may face risks beyond the loss of physical property and assets, such as threats to their reputation or loss of a trade secret.
Unfortunately, insurance protection has limits and it cannot protect an individual or business from every type of risk. Insurers call these "uninsurable risks."
What is an “Uninsurable Risk”?
Insurance spreads risk over many policyholders. The insurance company collects premiums and measures their fees against the likelihood of a claim. Insurance companies can only survive if claims don't occur too often.
When a risk is very likely to cause loss, or the cost of a claim would be too high, the insurance industry may consider it an uninsurable risk. Take, for example, a patient who wants health insurance but has terminal cancer. The likelihood of paying out a claim is certain and the insurer will not take on the risk. The healthcare costs for the patient would be very high and the payout would come very soon so they couldn’t possibly collect sufficient premiums to compensate for those expenditures.
You’re also not likely to find an insurance company eager to sell life insurance to someone who is over 100 years old. The insurance company couldn’t collect sufficient premiums and coverage would burden the pool of insured people and drive up premiums, making coverage unaffordable (find out more about What Influences Life Insurance Premiums).
Insurers will also deem a risk uninsurable if they cannot offer coverage because the risk is illegal. For instance, an insurer cannot protect you from criminal fines and penalties.
Types of Uninsurable Risks
While cases of people being unable to get health or life insurance because the likelihood that they will file a claim or the expected cost are too high are concrete examples of uninsrable risks, there are also less tangible ones.
For instance, if you own a business you may want to insure yourself against every type of risk, but an insurance policy cannot protect you against all of them. Insurers cannot estimate the extent of damages or the costs if war breaks out or a pandemic sweeps through your city, but they know these events would certainly include hefty costs. Consequently, they either won’t protect you from loss from these kinds of events or you’ll need specific coverage.
An insurance company also may not offer coverage for unpredictable events within industries. They cannot accurately predict what will happen on the stock market, how technology will change, or what people will pay for a product tomorrow.
According to The Network, a training and compliance company, 17,763 changes to the laws, rules and regulations occurred in 2012 in the banking and financial sectors alone. This complexity and constant evolution makes many regulatory risks uninsurable.
Public sentiment can cause loss too, but insurance products cannot always protect against them. Insurers have no way to predict the impact and no way to determine appropriate premiums. For example, a lawsuit by city council on behalf of some residents of Irwindale, California almost closed down the Sriracha plant located in that city. Families complained about air quality, organized a lawsuit through the city council, and almost shut down operation permanently. Even though the city council dropped the lawsuit, it seriously affected company profits for many months but.
Governments can cause loss too. They can change the rules, close businesses, or severely limit their operations. Once again, insurance companies have no way to predict this. For instance, the Obama administration instituted stiff fine fines for greenhouse gas emissions that will seriously impact energy industry profits. Although that is a real loss, insurance will not cover it.
Damage to your reputation isn’t something insurance can always cover either. General Motors took a major hit when they took too long to recall 2.6 million cars with faulty ignition switches. Thirteen people died and over fifty had accidents as a result of their slow response. While some insurance policies cover crisis management or product recall expenses, most do not cover loss from reputational harm. There’s no way to predict its scope or costs.
The point is that insurance usually protects against calculable threats. This isn’t to say you cannot buy insurance for very unpredictable events, but it’s not the norm and you may have to pay higher premiums.
Insurance isn’t static. It evolves as new risks emerge and begin playing a vital role, even if it continues to have limitations. For instance, a threat such as cyber crime was rare thirty years ago, but is common today. The insurance industry now offers cyber-liability protection to diminish risk.
It used to be the case that most forms of insurance didn’t cover sexual harassment and discrimination claims either. However, the insurance industry responded to customer needs and now offers Employment Practices Liability Insurance (EPLI) that covers issues such as discrimination based on religion, gender or race, unfair work practices, sexual harassment, and other issues that were previously considered uninsurable.
Whether you need personal or business coverage for risk, it is important to speak to your agent or broker. They will work with you and pinpoint your vulnerabilities.
People often wait too long to buy coverage. For instance, the person with terminal cancer could have bought health insurance when they were well. It is often easier and less expensive to find products before there’s a problem.
Some states offer insurance for uninsurable risks through "high-risk pools." However, these policies will be more expensive and may include strict limits. Government agencies may also cover some uninsurable risks, such as floods. You’ll need in-depth insurance information from a professional to make informed decisions.
No one can predict the future or eliminate risk, but you can certainly protect yourself as much as possible. When you consult an insurance expert, they’ll analyze your risk and suggest appropriate products. As mentioned, even some “uninsurable” risks are insurable. It is important for you to know when insurance can and cannot protect so that you can better prepare for the future.