The issue of compensation for material damage in the event of unforeseen situations is simply ignored by most Russians. “This won’t happen to me,” every second takes a similar position. Dismissal from work, injury at work, car damage in an accident, household gas explosion in an apartment building – this is just a small list of circumstances that result in damage to the property and health of the victim. It is compensated under the insurance program. The question of what risk insurance is and what types of risk insurance is in high demand among customers does not lose its relevance. Let’s consider it in more detail.
The concept of insurance risk
Any field of activity is associated with risks of both property and non-property nature. Often, the scale of the consequences that arise as a result of unforeseen circumstances is not known to anyone in advance. The desire of a person to protect property interests in the event of threats is quite justified.
From this we can conclude that the insured risk is a hypothetical event, against the occurrence of which a person is insured. When it occurs, the injured person is guaranteed to receive monetary compensation. You can contact the insurance company and choose any risks that seem relevant to the client. Health, life and property are priority values for every person, so the emphasis on insuring the risks of becoming disabled, dying from diseases with a high degree of lethality or losing your home due to natural disasters is obvious.
Distinctive features
But not every event that occurred in life generates monetary compensation from the insurer. What requirements must meet the insurance risk?
First, it must be random (no one can predict when and where the event will happen).
Second, it must be probable (it could either occur or not occur).
Thirdly, it should not be single (the probability of an event occurring depends on the analysis of statistical data and patterns on the basis of which similar risks arise).
Fourth, it should not have catastrophic consequences (technogenic cataclysms, coups, rebellions, wars).
A feature of insurance risks is that their occurrence cannot depend on the will of the policyholder or other beneficiaries. Events that hypothetically promise the insured a monetary gain are considered speculative and do not belong to the category of insurance (lottery, casino games, bets).
The amount of monetary compensation is determined taking into account the selected list of risks. The Client has the right to foresee one or more events, the occurrence of which guarantees material compensation. In monetary terms, the cost of a possible threat is determined based on the base rate or as a percentage of its value.
Consider the main features of insurance risks – only those events that can happen hypothetically are included in the contract, and everything that is inevitable or known in advance is not a basis for compensation.
Hidden insurance risk algorithms
For any company, the analysis of the probability of an insured event is an invaluable experience. As for the client, for him the questions of whether the event will happen, when and where, remain open. He simply cannot predict the answer.
The insurer in the process of commercial activity is exposed to the only risk, which is usually called technical. Initially, the company expects that if the event does happen, it will not have to compensate the counterparty for damages in a larger amount than planned. In the context of such a forecast, the insurer will intensify activities aimed at promoting preventive measures in order, for example, to reduce the number of accidents on the roads or level out cases of careless handling of fire. Such initiatives reduce the likelihood of occurrence of events recorded in the contract with customers.
But it is necessary to remember the regularity — the same type of risk can affect a large number of objects in one period. And yet, within the framework of the observed population, it is impossible to foresee all hypothetical forecasts.
Despite the apparent equivalence of the concepts, the insured risk differs from the insured event. If in the first variant the threat is only expected (it has not yet been realized), then in the second it is a fait accompli and a legal basis for the fulfillment of obligations by the company.
Threat classification
There are many criteria that differentiate events that provide for monetary compensation. For example, in personal insurance programs, customers prefer to indicate the risks associated with work, travel and leisure.
An industrial injury, an acquired disease, a flight delay, loss of luggage during a trip – in the event of these circumstances, the insured has the right to count on monetary compensation.
The line of property insurance programs is focused on monetary compensation in case of flooding of an apartment, explosion of household gas, robbery, robbery, making mistakes during repair work.
As part of motor insurance, the policyholder is entitled to a payout if his vehicle was damaged in a traffic accident or was stolen by intruders by burglary.
But in the classification it is customary to distinguish insurance and non-insurance risks. If the former are included in the agreement, then the latter are exceptions to the contract and payment is not provided for them.
How to determine what is an insurance risk? To do this, it is necessary to analyze the degree of probability of the occurrence of an event. If it is not known in advance whether it will happen or not, and the degree of hypotheticality can be estimated, then the risk will be insurance.
Let us consider the main criteria by which events in the insurance system are differentiated.
Source of danger
There are events that are classified as natural disasters – landslides, mudflows, fires, floods, sandstorms, avalanches, and so on. They are counterbalanced by the risks arising from the illegal actions of a person (robbery, theft, acts of vandalism, fraud).
Economic result
Taking into account this criterion, the following types of insurance risks are distinguished – pure and speculative. The first category includes events that, from the point of view of profit, are fraught with a zero effect or may cause material damage (man-made disasters, natural disasters). The second category includes potential threats, as a result of which you can get an unpredictable result in income (positive, zero or negative).
Degree of responsibility of the insurance company
Given this parameter, the risk can be individual and universal. In the first case, unique objects of special value (antiques, art objects) are protected. When drawing up a contract, all risks that can happen to a rare item (during its operation or transportation) are taken into account. Events that are universal in nature are illegal actions (robbery, robbery, theft, theft). Compensation for them is provided for in almost all property agreements.
Specific risks
This category includes catastrophic, abnormal and major insurance risks.
It is customary to call catastrophic events provoked by the forces of nature and the human factor. They cause significant damage, therefore, for clients of insurance companies, protecting property complexes from such risks is task No. 1.
Threats of an abnormal nature do not allow integrating objects into a specific insurance group. If the hypothetical loss exceeds the amount of financing allocated by the company for reimbursement, then an agreement is concluded with the client on special terms. A thorough examination is carried out in relation to the object. Settlements for an abnormal event that caused damage in an amount not exceeding the planned deposit are carried out on a general basis.
Major threats are of a single nature and are fraught with significant losses for the insured. Often, a company cannot compensate for such a risk on its own, therefore, to solve the problem, market participants resort to the reinsurance procedure.
Transport threats
Taking into account this criterion, two types of insurance are distinguished – cargo and hull insurance. The first option provides for the protection of goods delivered by road, rail, water and air transport. Casco insures locomotives, ships, airliners, cars during periods of their repair, downtime or movement.
Environmental threats
This category includes events that entail pollution of nature. Mostly they arise due to the human factor. Environmental insurance services are chosen by companies in the manufacturing sector, resource-supplying organizations, transnational corporations and developers. Voluntary insurance programs are provided for them.
Threats of a political nature
Revolutions, military operations, rebellions, acts of nationalization and confiscation, a ban on the export and import of goods into the country are examples of political insurance risks. They interfere with business activities. By choosing the optimal program, enterprises and business structures can protect financial interests in the event of expropriation, currency inconvertibility or default on contracts.
Risks of civil liability
Such threats arise at high-risk facilities and transport (road, rail, sea, aviation). The owner of an enterprise that manufactures, processes or transports radioactive substances, flammable components or chemical compounds, has the right to protect his civil liability to third parties. In the event of an emergency, compensation for damage becomes the responsibility of the insurer.
Investment risks
Many clients of capital multiplication companies want to protect themselves from the losses associated with investing. For example, you can consider as an insurance risk the probability of a decrease in the yield on coupon payments and dividends. Depositors have the right to choose protection against direct financial losses arising from errors on the exchanges or the wrong choice of an instrument for investment. There are also programs to protect the client from bankruptcy.
Technical Threats
Companies in the manufacturing sector are interested in programs that allow them to receive monetary compensation in the event of a breakdown of equipment, units, as well as in the event of process failures. But when insuring against such threats, difficulties often arise regarding the choice of damage assessment methodology and associated with the frequency of accidents. Technical threat insurance allows you to receive compensation for damage caused by a variety of reasons.
Stages of risk management
In their work, insurance companies adhere to a system in which the risk:
- is identified;
- evaluated;
- analyzed;
- controlled;
- funded.
Let’s consider each stage separately.
The identification process involves an analysis of the causes of occurrence, a preliminary assessment and classification of risk factors. To individualize the event, monitor such parameters as the insured event and the object of insurance. A complex identification system is provided for in property insurance programs. The company is obliged to deal with the statistics of objects and analyze the data obtained from them. Based on this information, all risky circumstances are identified. Then all property objects are divided into risk groups. To determine the probability of an event occurring, algorithms based on the use of mathematical and statistical methods are used.
Insurance risk assessment is carried out using:
- The method of average values (risk groups are divided into subcategories, which allows you to identify events according to certain characteristics).
- The method of individual assessment (used if the event is not compared with the average type of risk, the insurance company uses a subjective approach based on its own experience and professional training).
- Percentage method (allows you to determine allowances and discounts to the generated database, taking into account negative and positive deviations from the average type).
In the analysis of events, insurance companies use statistical and empirical methods, as well as methods of documentary accounting and observation. These tools help to identify a causal relationship between the alleged threat and the object of insurance.
The control function is expressed in the forecast of the complete or partial leveling of the insured event using various methods – evasion, localization, reduction, transfer (separation). Minimization of insurance risk is carried out by the company through preventive (warning) measures.
The probability of occurrence of an event can be controlled, and if, despite proactive actions, it still happened, then the company focuses its efforts on localizing the current threat.
The financing procedure is carried out by investing monetary assets in a special fund, from which the damage to the victims is subsequently compensated. Initially, the company sets the task of creating a deposit that could cover all losses of clients. The insurance fund can be accumulated from reserve and current receipts (self-financing) or replenished by attracting captive structures (those established by large industrial concerns).
Analyzing the entire set of hypothetical threats that can occur in life, it must be remembered that one cannot protect oneself from everything at once. You can insure individual objects against specific categories of threats. Be prepared for the fact that the company has a list of enterprises that it will refuse to insure. To make sure that the risk will be compensated, carefully read the terms of the contract.