What is the function of an insurable risk?

The function of an insurable risk is primarily to allow coverage of significant probabilities of loss. An insurable risk is characterized by certain conditions that make it feasible for an insurer to provide coverage. These conditions include being uncertain in nature, resulting in a potential financial loss to the insured, and having a sufficient number of similar risks to allow the insurer to predict losses accurately. By focusing on risks with substantial probabilities, insurers can create a pool of similar risks, allowing them to estimate and manage potential losses effectively.

This approach ensures that the coverage can be provided at a rate that is fair for both the insurer and the insured, facilitating a sustainable insurance model. Understanding insurable risks helps ensure that insurance products remain viable and accessible to individuals and businesses seeking potential financial protection against unforeseen events.