Non-insurable Risk
What Does Non-insurable Risk Mean?
A non-insurable risk is one that insurance companies consider too hazardous or financially impractical to cover. These risks are typically commercially uninsurable, illegal for insurers to underwrite, or carry the potential for catastrophic loss.
Common examples of non-insurable risks include:
- Residential overland water.
- Earthquakes.
- Nuclear hazards.
- Terrorist acts.
- War.
- Acts of a foreign enemy.
While these risks are usually excluded from standard insurance policies, some coverage may be available for an additional premium or through specialty insurers.
These risks are deemed too high for insurers to assume financial responsibility due to their high frequency or the potential for massive losses that could jeopardize the insurer’s financial stability. Insurance companies prioritize maintaining financial solvency to ensure they can continue meeting their obligations to policyholders and other stakeholders.
Ultimately, insurers determine that these risks are not profitable to insure and therefore decline to offer coverage for them. Non-insurable risks are also sometimes referred to as uninsurable risks.
Insuranceopedia Explains Non-insurable Risk
The primary priority for insurance companies—aside from generating profits for shareholders—is to maintain financial stability. This ensures they can fulfill their financial obligations to policyholders by paying valid claims or returning unearned premiums. To achieve this, insurers often decline to provide coverage for risks they consider unprofitable.
Insurance companies may classify a risk as unprofitable for several reasons, but the two most common are:
- High Probability of Loss
These risks involve frequent claims. Even if individual claims are relatively small, the cumulative cost can be significant. Additionally, processing and adjudicating a high volume of claims demands substantial administrative time and resources, further increasing costs. - Potential for Catastrophic Loss
This pertains to non-insurable risks like war, nuclear hazards, or earthquakes. When catastrophic losses occur, the potential payouts are so enormous that they could bankrupt the insurer or severely undermine its financial stability.
Considering these two factors, insurance companies avoid risks that are almost certain to result in financial losses. In simple terms, taking on such risks is bad business.
For example, a life insurance company might classify an 80-year-old individual with lung cancer as a non-insurable risk because the likelihood of their death before the policy becomes profitable is extremely high.
In some cases, states provide insurance for non-insurable risks through “high-risk pools.” However, these policies often come with very high premiums and limited coverage.
