The term “insurable risk management” is generally used in connection with the insurable risks of companies. This, along with other activities like financial risk management, form the comprehensive risk management strategy of a company.
For effective insurable risk management, one should first understand how a risk can be treated.
An insurable risk can be transferred to another party by purchasing an insurance policy.
A company can retain the risk and make arrangements for facing it by providing reserves or by any other method.
A business can reduce risk by equipping itself with safety equipment like fire extinguishers, sprinklers, fire alarms and so on.
A firm can even avoid a particular risk by refraining from conducting risky activities which could cause losses.
The next step in ‘insurable risk management’ would be to understand the meaning of insurable risk. A company may face many kinds of risks but not all of them can be passed on to an insurance company by purchasing an insurance policy.
An insurer will accept only those risks which satisfy a few criteria-
If a particular kind of risk is insured by only a few, the insurer would not be able to profit. This is because, more often than not, the people who are most likely to be affected would buy insurance. This is called ‘adverse selection’ and insurer would end up paying more than the total amount received from insurance premium.
An insurer would consider undertaking a risk only if the risk is definite and measurable. If the occurrence of loss as well as the amount of loss is not clear, he would refrain from issuing a policy for that risk.
Those who are responsible for ‘insurable risk management’ of a business should also keep in mind that the loss should be due to the happening of a contingent event, that is, an event which may or may not happen. No insurer will undertake to compensate for a loss caused by an event which is sure to occur.
Those responsible for insurable risk management of a company have to first identify the risks, study whether they are insurable risks and then arrange for adequate insurance so that the company is protected against losses caused by the likely occurrence of certain events.