How insurance companies think about risk?

Written by Michael McAlary

Another way to look at insurance is to view risk through the prism of an insurance company. Events may be categorised into:

• Well defined and insurable events, e.g. fire. Insurance companies have lots of data on these types of events and as their impact is well defined, so is the risk
• Relatively undefined, but possibly insurable events, e.g. trauma insurance covers events such as heart attack, and although the event can be defined the impact is less certain. So the amount of cover is limited even though the financial impact may be greater
• Non-insurable events. These are events that insurance companies are unwilling to insure because the financial impact is unascertainable. An example of this is economic downturn

The above diagram shows these risks and as can be seen the further the event is out on the horizontal axis the less insurable it becomes. Individuals and companies seeking insurance by understanding the insurance companies “thinking” are better placed to negotiate premiums.