Insurability
Encyclopedia
Insurability can mean either whether a particular type of loss (risk) can be insured in theory, or whether a particular client is insurable for by a particular company because of particular circumstance and the quality assigned by an insurance provider pertaining to the risk
that a given client would have.
An individual with very low insurability may be said to be uninsurable, and an insurance company will refuse to issue a policy to such an applicant. For example, an individual with a terminal illness
and a life expectency of 6 months would be uninsurable for term life insurance
. This is because the probability is so high for the individual to die within the term of the insurance, that he/she would present much too high a liability for the insurance company. A similar, and stereotypical, example would be earthquake insurance
in California
.
Insurability is sometimes an issue in case law
of torts and contracts. It also comes up in issues involving tontine
s and other insurance fraud
schemes. In real property law and real estate
, insurability of title
means the realty is marketable.
of a life insurance
policy to prove need for the proceeds, called the "insurable interest doctrine". Specifically, insurable interest is:
Thus, husbands/wives have an insurable interest in their spouse, and children have an insurable interest in their parents (and vice-versa). Close relatives are assumed to have an insurable interest in the lives of those relatives, but more distant relaives, such as cousins and in-laws cannot buy insurance of the lives of others related by these connections.
A person is presumed to have an insurable interest in his or her own life, preferring to be alive and in good health rather than being sick, injured or dead. If a person obtains an insurance policy on their own life, it is presumed that the person would only name a beneficiary who wants the insured to be alive and healthy.
A person is considered to have an unlimited interest in the life of their spouse, which the law considers broadly equivalent to having an insurable interest in their own life. Even if not financially dependent on the other, it is legitimate to insure against the death of a spouse. Although many insurers will accept policies of cohabiting
couples, they could potentially be invalidated. In recent years, there have been moves to pass clear statutory provisions in this regard, which have not yet borne fruit. Similar treatment was recently extended to civil partners under section 253 of the Civil Partnership Act 2004
and in the law of some states
.
Insurable interest is no longer strictly an element of life insurance contracts under modern law, for example with viatication agreements and charitable
donation
s.. Often there is no requirement today that the beneficiary have a proven insurable interest in the life of the insured when the insured has purchased the insurance..
Risk
Risk is the potential that a chosen action or activity will lead to a loss . The notion implies that a choice having an influence on the outcome exists . Potential losses themselves may also be called "risks"...
that a given client would have.
An individual with very low insurability may be said to be uninsurable, and an insurance company will refuse to issue a policy to such an applicant. For example, an individual with a terminal illness
Terminal illness
Terminal illness is a medical term popularized in the 20th century to describe a disease that cannot be cured or adequately treated and that is reasonably expected to result in the death of the patient within a short period of time. This term is more commonly used for progressive diseases such as...
and a life expectency of 6 months would be uninsurable for term life insurance
Term life insurance
Term life insurance or term assurance is life insurance which provides coverage at a fixed rate of payments for a limited period of time, the relevant term. After that period expires coverage at the previous rate of premiums is no longer guaranteed and the client must either forgo coverage or...
. This is because the probability is so high for the individual to die within the term of the insurance, that he/she would present much too high a liability for the insurance company. A similar, and stereotypical, example would be earthquake insurance
Earthquake insurance
Earthquake insurance is a form of property insurance that pays the policyholder in the event of an earthquake that causes damage to the property...
in California
California
California is a state located on the West Coast of the United States. It is by far the most populous U.S. state, and the third-largest by land area...
.
Insurability is sometimes an issue in case law
Case law
In law, case law is the set of reported judicial decisions of selected appellate courts and other courts of first instance which make new interpretations of the law and, therefore, can be cited as precedents in a process known as stare decisis...
of torts and contracts. It also comes up in issues involving tontine
Tontine
A tontine is an investment scheme for raising capital, devised in the 17th century and relatively widespread in the 18th and 19th. It combines features of a group annuity and a lottery. Each subscriber pays an agreed sum into the fund, and thereafter receives an annuity. As members die, their...
s and other insurance fraud
Insurance fraud
Insurance fraud is any act committed with the intent to fraudulently obtain payment from an insurer.Insurance fraud has existed ever since the beginning of insurance as a commercial enterprise. Fraudulent claims account for a significant portion of all claims received by insurers, and cost billions...
schemes. In real property law and real estate
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
, insurability of title
Title
A title is a prefix or suffix added to someone's name to signify either veneration, an official position or a professional or academic qualification. In some languages, titles may even be inserted between a first and last name...
means the realty is marketable.
Characteristics of insurable risks
Risk which can be insured by private companies typically share seven common characteristics.- Large number of similar exposure units. Since insurance operates through pooling resources, the majority of insurance policies are provided for individual members of large classes, allowing insurers to benefit from the law of large numbersLaw of large numbersIn probability theory, the law of large numbers is a theorem that describes the result of performing the same experiment a large number of times...
in which predicted losses are similar to the actual losses. Exceptions include Lloyd's of LondonLloyd's of LondonLloyd's, also known as Lloyd's of London, is a British insurance and reinsurance market. It serves as a partially mutualised marketplace where multiple financial backers, underwriters, or members, whether individuals or corporations, come together to pool and spread risk...
, which is famous for insuring the life or health of actors, actresses and sports figures. However, all exposures will have particular differences, which may lead to different rates. - Definite Loss. The loss takes place at a known time, in a known place, and from a known cause. The classic example is death of an insured person on a life insurance policy. Fire, automobile accidents, and worker injuries may all easily meet this criterion. Other types of losses may only be definite in theory. Occupational disease, for instance, may involve prolonged exposure to injurious conditions where no specific time, place or cause is identifiable. Ideally, the time, place and cause of a loss should be clear enough that a reasonable person, with sufficient information, could objectively verify all three elements.
- Accidental Loss. The event that constitutes the trigger of a claim should be fortuitous, or at least outside the control of the beneficiary of the insurance. The loss should be ‘pure,’ in the sense that it results from an event for which there is only the opportunity for cost. Events that contain speculative elements, such as ordinary business risks, are generally not considered insurable.
- Large Loss. The size of the loss must be meaningful from the perspective of the insured. Insurance premiums need to cover both the expected cost of losses, plus the cost of issuing and administering the policy, adjusting losses, and supplying the capital needed to reasonably assure that the insurer will be able to pay claims. For small losses these latter costs may be several times the size of the expected cost of losses. There is little point in paying such costs unless the protection offered has real value to a buyer.
- Affordable Premium. If the likelihood of an insured event is so high, or the cost of the event so large, that the resulting premium is large relative to the amount of protection offered, it is not likely that anyone will buy insurance, even if on offer. Further, as the accounting profession formally recognizes in financial accounting standards, the premium cannot be so large that there is not a reasonable chance of a significant loss to the insurer. If there is no such chance of loss, the transaction may have the form of insurance, but not the substance. (See the U.S. Financial Accounting Standards BoardFinancial Accounting Standards BoardThe Financial Accounting Standards Board is a private, not-for-profit organization whose primary purpose is to develop generally accepted accounting principles within the United States in the public's interest...
standard number 113) - Calculable Loss. There are two elements that must be at least estimable, if not formally calculable: the probability of loss, and the attendant cost. Probability of loss is generally an empirical exercise, while cost has more to do with the ability of a reasonable person in possession of a copy of the insurance policy and a proof of loss associated with a claim presented under that policy to make a reasonably definite and objective evaluation of the amount of the loss recoverable as a result of the claim.
- Limited risk of catastrophically large losses. Insurable losses are ideally independent and non-catastrophicCatastrophe modelingCatastrophe modeling is the process of using computer-assisted calculations to estimate the losses that could be sustained due to a catastrophic event such as a hurricane or earthquake...
, meaning that the one losses do not happen all at once and individual losses are not severe enough to bankrupt the insurer; insurers may prefer to limit their exposure to a loss from a single event to some small portion of their capital base, on the order of 5 percentPercentageIn mathematics, a percentage is a way of expressing a number as a fraction of 100 . It is often denoted using the percent sign, “%”, or the abbreviation “pct”. For example, 45% is equal to 45/100, or 0.45.Percentages are used to express how large/small one quantity is, relative to another quantity...
. Capital constrains insurers' ability to sell earthquake insuranceEarthquake insuranceEarthquake insurance is a form of property insurance that pays the policyholder in the event of an earthquake that causes damage to the property...
as well as wind insurance in hurricane zones. In the U.S., flood riskFlood insuranceFlood insurance denotes the specific insurance coverage against property loss from flooding. To determine risk factors for specific properties, insurers will often refer to topographical maps that denote lowlands, floodplains and floodways that are susceptible to flooding.-Hidden floods:Nationwide,...
is insured by the federal government. In commercial fire insurance it is possible to find single properties whose total exposed value is well in excess of any individual insurer’s capital constraint. Such properties are generally shared among several insurers, or are insured by a single insurer who syndicates the risk into the reinsuranceReinsuranceReinsurance is insurance that is purchased by an insurance company from another insurance company as a means of risk management...
market.
Insurable interest
Insurable interest refers to the right of property to be insured. It may also mean the interest of a beneficiaryBeneficiary
A beneficiary in the broadest sense is a natural person or other legal entity who receives money or other benefits from a benefactor. For example: The beneficiary of a life insurance policy, is the person who receives the payment of the amount of insurance after the death of the insured...
of a life insurance
Life insurance
Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger...
policy to prove need for the proceeds, called the "insurable interest doctrine". Specifically, insurable interest is:
Thus, husbands/wives have an insurable interest in their spouse, and children have an insurable interest in their parents (and vice-versa). Close relatives are assumed to have an insurable interest in the lives of those relatives, but more distant relaives, such as cousins and in-laws cannot buy insurance of the lives of others related by these connections.
A person is presumed to have an insurable interest in his or her own life, preferring to be alive and in good health rather than being sick, injured or dead. If a person obtains an insurance policy on their own life, it is presumed that the person would only name a beneficiary who wants the insured to be alive and healthy.
A person is considered to have an unlimited interest in the life of their spouse, which the law considers broadly equivalent to having an insurable interest in their own life. Even if not financially dependent on the other, it is legitimate to insure against the death of a spouse. Although many insurers will accept policies of cohabiting
Cohabitation
Cohabitation usually refers to an arrangement whereby two people decide to live together on a long-term or permanent basis in an emotionally and/or sexually intimate relationship. The term is most frequently applied to couples who are not married...
couples, they could potentially be invalidated. In recent years, there have been moves to pass clear statutory provisions in this regard, which have not yet borne fruit. Similar treatment was recently extended to civil partners under section 253 of the Civil Partnership Act 2004
Civil Partnership Act 2004
The Civil Partnership Act 2004 is an Act of the Parliament of the United Kingdom. The Bill for this Act was introduced by the Labour government and supported by the Conservative and Liberal Democrat opposition. The Act grants civil partnerships in the United Kingdom with rights and...
and in the law of some states
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
.
Insurable interest is no longer strictly an element of life insurance contracts under modern law, for example with viatication agreements and charitable
Charity (practice)
The practice of charity means the voluntary giving of help to those in need who are not related to the giver.- Etymology :The word "charity" entered the English language through the Old French word "charité" which was derived from the Latin "caritas".Originally in Latin the word caritas meant...
donation
Donation
A donation is a gift given by physical or legal persons, typically for charitable purposes and/or to benefit a cause. A donation may take various forms, including cash, services, new or used goods including clothing, toys, food, and vehicles...
s.. Often there is no requirement today that the beneficiary have a proven insurable interest in the life of the insured when the insured has purchased the insurance..