ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Insurance companies and risk: Why insurers deny business to remain viable

Updated on July 27, 2012

While the common stereotype is that insurance companies are averse to risk, it is merely a half-truth.

Actually, insurers tend to avoid risks that are considered substandard or uninsurable. They are also averse to paying claims that were not covered in the insurance contract, but that’s another story.

Insurance is a great social concept, but it is not a charity at the same time. Insurers provide coverage for risks in the hope of remaining profitable.

While some insurers have astronomical profit margins, the risk that they accept to turn over profit is quite significant and potentially devastating to the business.

It may disappoint conspiracy theorists to note that there are several plausible insurance-related and business reasons for insurance companies to avoid or mitigate certain risks.

1) Underwriting losses

When an insurer pays out more money on a policy than it received in premiums for that policy, this is considered an underwriting loss. Often, insurance companied incur underwriting losses without even issuing a policy (for instance, when the insured decides not to accept revised premiums after extensive and expensive medical tests). If insurers insured everything under the sun, the extent of underwriting losses would be prohibitive to them. Proper risk management reduces underwriting losses that can hamper the stability of the insurer.

2) Anti-selection

It is a known fact in the insurance industry that persons or entities that are high-risk are more likely to seek insurance than those who are not. This tendency is known as anti-selection. Naturally, the probability of paying claims if policies were issued in cases of anti-selection are ridiculously high. Therefore, the application process is even more rigorous when higher levels of coverage are involved. To guard against anti-selection, underwriters employ concepts such as deductibles, excess and exclusions.

3) Moral hazard

To expect honesty from all strangers because they are prospective clients is very optimistic to say the least. Moral hazard refers to the risk of dishonesty in an insurance application. This includes non-disclosure and misrepresentations – willful or otherwise. To guard against moral hazard, insurance contracts often contain exclusion clauses and restrictions that serve to complicate them even further.

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.

 

4) Restricting speculation

I recall a person suggesting to me that insurance is a gamble between the insurer and the insured. While that’s an interesting way of looking at it, insurance was not intended for the insured to make a profit.

This is especially true with commercial insurance, but also applies to life insurance. With life insurance contracts, there should be some parity between the sum assured and the economic value of the insured.

Wagering or speculation is illegal and unethical in the insurance industry. Insurance companies are quick to deny claims or applications if they have evidence that this was involved.

5) Lower premiums

Affordability is a key factor for insurers, or any business for that matter. If premiums were prohibitive, it would be untenable to provide coverage. Some risks are just too high for an insurer to accept, especially risks with potential for catastrophic losses. Just imagine the premium a terminally ill patient would be required to pay for even $50,000 of coverage. The contract would not be favourable to the insurer or the insured. Risk management helps insurance maintain lower premium levels and be able to provide coverage to more individuals or entities.

6) Profitability

It’s no secret that insurance companies aim to make a profit. However, this is not confirmation that insurance is a rip-off. Instead, it is a profit-making industry that provides an important service to society. Insurance is literally risky business, but being too liberal with risks would affect the viability of insurers.

Insurance Theory and Practice
Insurance Theory and Practice

Written in accessible, non-technical style, Insurance Theory and Practice begins with an examination of the insurance concept, its guiding principles and legal rules before moving on to an analysis of the market, its players and their roles and relationships.

 

7) Duty to policy holders as a 'going concern'

Catastrophic losses, or frequent and substantial underwriting losses, can lead to an insurer being illiquid or insolvent. Since insurance – particularly life insurance – is a long-term affair, it is imperative that the insurer remain a going concern for as long as possible.

It is also important that clients and other stakeholders have confidence in the insurer’s ability to remain a going concern. Since poor risk selection is inimical to this objective, insurers need to deny certain risks or even refuse business towards this end.

Conclusion

Adherence to sound insurance principles and policies is the main reason why insurers seem risk averse. However, it is imperative that insurance companies must discriminate when it comes to the type, nature and scope of applications that are made for coverage or claims that are made. It is better to think of insurance companies as being in the business of protecting against insurable risks.

Although some insurance companies give the industry a bad name with unwieldy claims processes, poor information and seedy sales representatives, it is unfair to say that insurers are afraid of risk or are in the business of ripping off clients.

Comments

Submit a Comment

No comments yet.

working

This website uses cookies

As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com 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: https://hubpages.com/privacy-policy#gdpr

Show Details
Necessary
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 googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
Features
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)
Marketing
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.
Statistics
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)