Why All Risks Are Not Insurable

When running a business, risk management is crucial. One way companies manage risk is by purchasing insurance to transfer exposure to losses from certain events to an insurance company. However, not every potential risk a business faces is actually insurable.

In this comprehensive guide, we’ll cover:

• The key characteristics of an insurable risk
• Types of uninsurable business risks
• Examples of risks insurance companies won’t cover
• How startups can manage uninsurable risks
• Tips for maximizing your business insurance coverage

What makes a risk “insurable” in the first place?

For an insurance company to agree to cover a specific risk, it must have certain characteristics:

• Pure risk – The chance of loss with no possibility of gain. Auto damage and property loss are examples.
• Non-catastrophic – The potential loss must be affordable to cover.
• Random and unpredictable – The loss can’t be intentionally caused.
• Calculable loss rates – Insurers must be able to calculate probably frequencies and severities.
• Definite and measurable – The policy must have defined terms and measurable amounts.

Insurers use data and statistics to gauge the probability and extent of potential losses. When they cannot reliably predict losses or the risk is too expensive to take on, they deem it uninsurable.

Types of uninsurable business risks

There are several categories of risks that insurance companies are unable or unwilling to cover:

• Speculative risks – Where there is a chance for loss or gain, like investing in stocks.
• Reputational damage – Harm to a company’s brand or image is hard to quantify.
• Regulatory compliance – Fines for breaking laws are usually uninsurable by statute.
• Trade secrets theft – The value of stolen proprietary information is difficult to determine.
• Political instability – Risks like government coups or currency collapse in foreign countries.
• Pandemic-related losses – Widespread illness can cause untenable insured losses.

In many cases, the severity or unpredictability of potential losses make these uninsurable by regular commercial insurers.

Examples of specific uninsurable risks

While each insurance company makes its own determinations on insurability, here are some common examples of risks they will not cover:

• Natural disasters in very high-risk areas, like coastal flooding.
• Acts of war, rebellion, nuclear accidents.
• Losses from wear and tear or lack of maintenance.
• Falling profits, income loss, or poor business decisions.
• Criminal fines and penalties imposed on individuals or the company.
• Embezzlement of money by employees.
• Kidnapping or ransom payment demands.

The catastrophic nature or moral hazard concerns of these exposures lead most insurers to label them as uninsurable.

How can startups manage risks not covered by insurance?

Startups and small businesses will always face some uninsurable risks. Here are tips on managing exposures insurance won’t handle:

• Identify all key risks through a risk assessment process.
• For natural disaster risks, choose business locations wisely.
• Implement strong physical security and cybersecurity protocols.
• Perform thorough background checks before hiring employees.
• Establish detailed processes and controls for financial matters.
• Consult lawyers to ensure regulatory compliance.
• Have an emergency response plan for disasters and crises.
• Build cash reserves to withstand uninsured losses.
• Consider alternative risk transfer options like captive insurance.

While insurance is invaluable, it isn’t a cure-all. Companies must utilize all available methods to control uninsurable risks.

Tips for maximizing insurable business coverage

When buying insurance, partner with an experienced broker who can help you:

• Conduct a thorough assessment of your unique risks.
• Determine which risks are insurable vs. uninsurable.
• Evaluate your risk appetite and coverage needs.
• Identify specialty insurers willing to cover high-risk exposures.
• Negotiate tailored policies with broad coverage.
• Understand all policy terms, conditions, and limitations.
• Implement proper risk controls to reduce exposures.
• Explore options like higher limits or manuscript policies for risks insurers are reluctant to cover.

With the right guidance, you can transfer as much insurable risk as possible through insurance and focus on protecting your business from what remains.

The bottom line is that while insurance is invaluable for managing many risks, some exposures will always be uninsurable. Working closely with insurance experts and proactively controlling hazards through other means is the most effective way to keep your startup safe. Reach out to discuss your business’s unique risk profile and insurance needs.