What Does Non-insurable Risk Mean?
A non-insurable risk is a risk that the insurance company deems too hazardous or financially impractical to take on. These are typically risks that are commercially uninsurable, illegal for the insurance company to insure, or hold the potential for catastrophic loss.
Common examples include:
- Residential overland water.
- Nuclear hazard.
- Terrorist acts.
- Acts of a foreign enemy.
These are typical exclusions and some of this coverage is available for an additional premium or through a specialty insurer.
These types of risk are considered too high-risk for insurance companies to assume financial liability. This is because the frequency of these types of claims are very high or because there is the potential for a massive loss that would overwhelm the insurer’s ability to pay claims and remain financially stable.
The priority for insurance companies is to remain financially stable so they can remain in business and continue to meet their financial obligations to their clients and other stakeholders.
Regardless of the reason, insurers have determined that these risks are not profitable to insure and therefore they decline to offer that coverage.
Non-insurable risks are also sometimes referred to as uninsurable risks.
Insuranceopedia Explains Non-insurable Risk
The priority for insurance companies—aside from making money for shareholders—is to remain financially stable so they can meet their financial obligations to their insureds in terms of paying claims owed or returning unearned premiums. In order to meet that mandate, they will decline to offer coverage for certain risks that they deem to be unprofitable.
Insurance companies can consider a risk unprofitable for a variety of reasons but the most common 2 are:
High Probability of Loss - these are risks that come with frequent claims. Even if each claim is small, the sheer number of claims can really add up to a big sum for insurers. This is in addition to the administrative time and work required to process and adjudicate each claim as they arise.
Potential for Catastrophic Loss - this applies to non-insurable risks like war, nuclear hazards or even earthquakes. When one of these types of catastrophic losses occur, the amounts insurers could be liable for paying are so high that it would put them out of business or severely shake their financial stability.
Taking these 2 key factors into account, insurance companies will decline a risk because they know they will almost certainly lose money very quickly. In other words, assuming a risk with these 2 characteristics is bad business.
For example, a life insurance company may deem a person who is 80 years old and has lung cancer a non-insurable risk because the likelihood of their death before the policy becomes profitable is simply too high.
Sometimes, states provide certain types of insurance for non-insurable risks through "high-risk pools;" however, the premiums are often very high and provide very limited coverage.