Underwriting insurability criteria requires that actuarially the rates and premiums be determined with relative certainty. Otherwise the risk will be deemed uninsurable from the carrier standpoint. If the carrier is unable to price their products because of market conditions, regulatory constraints, or other environmental factors, the carrier might decide that this type of industry or classification is uninsurable from their standpoint. Below are some of the criteria that are used in underwriting.
Competitive criteria are always considered in this process. Even if the carrier can probably get a rate based on a tough risk exposure, if it is nowhere competitive no client is going to bother to purchase their products and services. So, if the carrier is not competitive sometimes they will just not bother with that industry.
Identifiable criteria is the another factor that is used in underwriting. Insured losses must be identifiable as to the time, cause of loss, place of loss, amount of loss, and responsible parties in order to determine whether this is a covered event. Potential losses that cannot be clearly identified will not normally be considered by an underwriter.
Predicting a loss is also used in this analysis. If losses cannot with a degree of certainty be predicted, then it is usually deemed uninsurable from insurance company's perspective. An example of this would be losses from nuclear explosion or radiation. The breadth and depth of those losses cannot be calculated as they could be global and last thousands of years.
The insurable risk also needs to be fortuitous. That's why in the areas of the country that are experiencing flooding that someone who wants to run out and purchase a flood policy won't be able to find it, as the flooding has already started.
The criterion includes the law of large numbers. If there's only one item of its kind that is looking for insurance, it probably is not insurable because it cannot be replaced or repaired. Generally speaking, the age-old axiom holds that insurance is based upon the law of large numbers. The smaller the number of insurable risks the tougher the risk and usually the higher the premium. The larger the numbers of risk usually leads to more competition and more insurance carriers competing for the business. Thus, the premiums are less in this class of business. Commoditization of most industries in our modern era has created larger units of exposure and less unique custom risk.
Insurable risks are accidental by nature, fortuitous events, and there needs large numbers of similar types of risk. In order to easily calculate the rates and premiums the risk should be easily identifiable as to time, place, and amount of potential loss. While we have discussed some general insurability criteria, each region of the Globe, each insurance carrier, and the specific risk in question can vary based on many circumstances.
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