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Difficulty: HardElements of Insurable Risk

An underwriter is evaluating four different commercial insurance applications and must decline each due to a violation of a core insurable risk element. Match each proposed risk scenario to the specific element of an insurable risk that it violates.

  • A utility company seeks a policy to cover the inevitable rust and corrosion of its underground iron pipes over their expected 50-year lifespan.Loss must be accidental and due to chance
  • A specialized property insurer is asked to provide total loss coverage for every business operating exclusively within a highly restricted, one-square-mile flood basin.Loss must not be catastrophic to the insurer
  • A technology firm applies for a policy to indemnify the company for the subjective 'loss of team morale' following a failed product launch.Loss must be definite, measurable, and quantifiable
  • An aviation enthusiast requests a 10,000policyforahighlyexperimentalaircraft,butunderwritingdeterminestherequiredannualpremiumwouldbe10,000 policy for a highly experimental aircraft, but underwriting determines the required annual premium would be 12,000.Premium must be economically feasible

Answer

Utility corrosion violates accidental/fortuitous; flood basin businesses violate non-catastrophic; team morale violates definite/measurable; 12,000premiumfor12,000 premium for 10,000 coverage violates economically feasible premium.
Each scenario represents a fundamental violation of underwriting principles. Expected deterioration is not chance; aggregated local flood risk causes catastrophic exposure; subjective feelings lack measurable financial value; and premiums exceeding the benefit make the transfer economically unfeasible.

Step-by-Step Solution

1
Analyze the utility company scenario regarding pipe corrosion.
Corrosion is an expected, inevitable process, not a fortuitous event.
Insurable risks must involve accidental losses outside the insured's control.
2
Evaluate the localized flood basin scenario.
Insuring all businesses in one small flood zone creates immense simultaneous exposure.
Insurers must avoid catastrophic losses by spreading risk, rather than concentrating it in a single peril-prone area.
3
Examine the team morale scenario.
Morale is a subjective feeling that cannot be assigned an objective dollar value.
Insurance requires losses to be financially definite and measurable to determine appropriate claim payouts.
4
Assess the experimental aircraft scenario.
The 12,000premiumexceedsthe12,000 premium exceeds the 10,000 potential benefit.
A premium must be economically feasible (affordable and reasonable compared to the risk) for the contract to function.

Key Concept

Elements of Insurable Risk
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Topics

Elements of Insurable Risk

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