ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Why insurance companies are cautious about risk: In defence of risk averse insurers

Updated on July 5, 2011

Some persons complain about insurers not accepting risk or denying payment for certain claims. While a few insurers really push the limit on good business practice, there is another side to it. Insurers must avoid substandard risks or those that are deemed uninsurable.

It may seem as though that defeats the purpose of insurance, but companies must remain viable – as going concerns. Therefore, they need to balance providing coverage with remaining profitable. As such, insurers have good reasons to avoid certain risks.

Underwriting losses

An underwriting loss refers to when insurers pay out more money than they received from particular policies. Aversion to high risks or uninsurable risks is a way of reducing underwriting losses – especially catastrophic ones – that could cause the company to collapse. Underwriting losses on too many policies would not be healthy for any insurance company.

For instance, if a medical insurer collected $3,000 in premiums from you, but had to pay a claim of $20,000 on your behalf, that represent an underwriting loss of $17,000. It is, therefore, imperative that insurance avoid very high risks, since the stability of the company is at stake.


It is natural for those who face more risks to seek insurance coverage; this tendency is referred to as anti-selection. A person who has medical problems is even likelier to seek coverage against future problems than a healthy individual with a good medical history Insurers need to be aware of this because such information is critical to assessing the level of risk.

As a result, applications are more rigorously reviewed – especially when high coverage levels are involved. Insurance concepts like deductibles, excess and policy exclusions are also used to prevent or manage the possibility of anti-selection.

Moral hazard

A “moral hazard” is a terms that refers to the risk of dishonesty occurring in an insurance transaction. If there seems to be willful misrepresentation or non-disclosure, insurers would be unwilling to accept the risk. Using policy exclusions, denying claims and voiding policies are just some of the methods of reducing moral hazard.

Fundamentals of Risk and Insurance
Fundamentals of Risk and Insurance

This classic book presents a thorough and comprehensive introduction to the field of insurance while emphasizing the consumer. The new Tenth Edition first examines the concept of risk, the nature of the insurance device, and the principles of risk management.


Preventing speculation

Insurance seeks to indemnify, not to allow persons to profit from losses. In fact, one of the principles of insurance declares that no one must profit from it. Even with life insurance, coverage should be comparable with a person’s economic value. Insurers who suspect speculation or illegal wagering in an application would be inclined to deny the risk or deny a claim.

Lower premiums

Proper risk management facilitates lower premiums as well. Certain risks are too high for insurers to cover comfortably. Assigning risks to categories ensure that the actuaries can determine premiums according to risk and eliminate risks that are way too costly. For instance, if a terminally ill patient seeks $500,000.00 in coverage, what premium could cover that without guaranteeing an underwriting loss? Whatever premium that is would not be worthwhile for the insured or the insurer.


It is no secret that insurers want to make a profit – and significant profits as well. This is not confirmation that insurance is a “rip-off.” Insurers merely take calculated chances in order to achieve their objectives. Most times it works out for them; a few times they do not. Being too liberal with risk would reverse that truth and negatively affect profit margins.

The Essentials of Risk Management
The Essentials of Risk Management

Globally renowned risk and corporate governance experts Michel Crouhy, Dan Galai, and Robert Mark have updated and streamlined their bestselling professional reference Risk Management to introduce you to the world of risk management without requiring you to know the intricate formulas and mathematical details.


Remaining a 'going concern'

Significant or frequent underwriting losses can make an insurer insolvent or illiquid. Risk-selection is the critical to sustaining long-term viability of an insurance company. Being somewhat risk-averse protects the insurer and their policyholders. If something affects the company’s viability, many more persons would be affected.

Adherence to insurance principles and policies

Insurers use a very robust risk-management system to analyze and select risk. These are based on a network of insurance principles (indemnity, subrogation and contribution for example) and policies outlined by insurance underwriting departments. Therefore, rejection of applications or denials of claims are not usually random, whimsical events.


Insurers must discriminate among risks for mere survival; as such, they would only accept insurable risks and stipulate premiums based on the extent of risk. Sometimes, the discretionary nature of underwriting or claims processes can fuel the perception that insurance is a “rip-off,” when that is the exception instead of the norm.

The Failure of Risk Management: Why It's Broken and How to Fix It
The Failure of Risk Management: Why It's Broken and How to Fix It

The Failure of Risk Management takes a close look at misused and misapplied basic analysis methods and shows how some of the most popular "risk management" methods are no better than astrology!



Submit a Comment

No comments yet.


This website uses cookies

As a user in the EEA, your approval is needed on a few things. To provide a better website experience, uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at:

Show Details
HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
LoginThis is necessary to sign in to the HubPages Service.
Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
AkismetThis is used to detect comment spam. (Privacy Policy)
HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the or domains, for performance and efficiency reasons. (Privacy Policy)
Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
MavenThis supports the Maven widget and search functionality. (Privacy Policy)
Google AdSenseThis is an ad network. (Privacy Policy)
Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
Index ExchangeThis is an ad network. (Privacy Policy)
SovrnThis is an ad network. (Privacy Policy)
Facebook AdsThis is an ad network. (Privacy Policy)
Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
AppNexusThis is an ad network. (Privacy Policy)
OpenxThis is an ad network. (Privacy Policy)
Rubicon ProjectThis is an ad network. (Privacy Policy)
TripleLiftThis is an ad network. (Privacy Policy)
Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)