Risks are all around you. Crossing the road is a risk, your health is at risk owing to changing and stressful lifestyles, even your house is at risk at all times from natural calamities that may strike suddenly. While you may face one or more of these risks, they are not bound to happen. However, insurers do not cover all types of risk; the risks they cover are known as insurable risks.
What is insurable risk?
In other words, the risk shouldn’t be so catastrophic that the insurer is unable to compensate you. Also, it is important that its occurrence is random in nature because if you can predict its occurrence, it ceases to be risk and become almost an eventuality. Take death for instance, during the sunset years of one’s life, death ceases to be a risk and is an eventuality, but for a young person, death is a risk. While the insurance company can’t protect you from the risk of dying young, it can certainly provide a financial cover to your family in case of early death. A life insurance policy does just that: you pay premiums to your insurer and cover the risk of leaving your family in a financial turmoil due to early death.
But an insurer will not insure you if he can’t define the loss. Hence, you need to choose a sum assured—the amount that the insurer pays to your beneficiary on death. Not only he needs to have a definite sense of the loss, the loss can’t be too catastrophic. Imagine an epidemic that claims most members in the pool.
What is utmost good faith?
This may not be a principle that helps insurers determine the risk or price the risk, but its presence is very important in any insurance contract. Insurance as we know is a contract between two parties where one party agrees to cover the risk of another in exchange for a price—known as premium—and promises to pay the expenses to the other party when the uncertain event (death in the example given above) takes place.
Therefore, here both the parties are required to be sincere. The insurance company is required to discharge with its duty of paying the compensation to the insured and the insured person is required to disclose all relevant information to the insurer to help him gauge the extent of risk. For example, if you are applying for life insurance, you are required to disclose any previous health problems you may have had. Likewise, the insurance agent selling you the coverage must disclose the critical information you need to know about your contract and its terms. A breach on either side can completely damage the purpose of insurance. If the insurer finds out that you didn’t disclose all the relevant information, it can refuse to pay the claim, while you can drag the insurer to court if all relevant information pertaining to the contract is not disclosed.
