An insurable risk must be a pure risk, meaning there is a potential for financial loss but no potential for gain. For example, the risk of a house fire is a pure risk because the homeowner can only lose money in the event of a fire. Gambling, on the other hand, is not an insurable risk because there is a potential for both gain and loss.
2. Definite Loss
The loss from an insured risk must be definite, meaning that it is certain to happen at some point. For example, the risk of death is a definite loss because everyone will eventually die. The risk of a car accident is also a definite loss, although the probability of an accident is not certain.
3. Large Number of Exposures
The risk must be shared among a large number of people so that the insurance company can spread the risk and avoid having to pay out too much money in claims. For example, the risk of a house fire is shared among all homeowners, so the insurance company can charge each homeowner a relatively small premium.
4. Accidental Loss
The loss from an insured risk must be accidental, meaning that it is not intentional or caused by the insured person. For example, the risk of a house fire is accidental because the homeowner does not intentionally set fire to their home. The risk of theft is also accidental, although the thief may be intentional in their actions.
5. Calculable Loss
The loss from an insured risk must be calculable, meaning that it can be estimated with reasonable accuracy. For example, the risk of a house fire can be calculated by considering the age of the home, the construction materials used, and the history of fires in the area. The risk of theft can also be calculated, although it is more difficult to estimate the value of stolen property.