What are the limits of insurability? / Part 2

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The first part of the article discussed whether the actuarial principles for the limits of insurability, randomness, estimability and independence due to current developments can still apply today. The other principles of uniqueness, size, and economy are put to the test in this article.

Uniqueness in the case of ambiguous and changing framework conditions

Uniqueness in the case of ambiguous and changing framework conditions

In order to the performance components to be formally and legally correct in the insurance contract, the characteristics of the insured event (insured risks, insured persons, insured property), the insured damage, and the insurance benefits must be clearly definable. Due to the rather slow change in the peripheral systems and the rather constant evolution of the existing product landscape, the definition of the insurance conditions has so far always been able to keep pace with the current developments in damage patterns and causes. Against the background of a stronger customer focus and the increased requirements for transparency and comprehensibility, it is becoming an increasingly difficult balancing act to formulate insurance conditions formally and legally and still find an understandable service definition for the customer. Despite the currently rapidly advancing (technological) developments, the definition must also have a long “half-life” and offer options for adjustments that meet the new customer requirements. In the future, for example, we will have to discuss how the trend towards the sharing economy will affect the formulation of the insured event – especially the insured persons and property. There are still considerable uncertainties here for borrowers, lenders and insurers and the current insurance products and contract designs sometimes do not match the changed framework conditions. For example, car insurance is currently linked to the car; the vehicle is insured and not the driver, making sense with car sharing.

Size: Too big to handle

Only those risks for which the insurer can meet the obligation to pay compensation can be insured. Therefore, the maximum loss of the insured individual risk must be below the (economic) capacity of an insurer or the entire insurance industry – or, in the case of social insurance, below the economic strength of a country. If this were not the case, an insured event would potentially lead directly to the insurer or the consortium’s insolvency. Thus the insurance cover would, as it were, come to nothing. A well-known example of a risk that cannot be insured due to the possible damage scenario is the worst-case scenario of a nuclear power plant. In 2011, the Versicherungsforen Leipzig calculated in a study that the maximum damage in a catastrophe in Germany would be around 6,000 billion euros. For comparison: Germany’s gross domestic product in 2018 was 3,386 billion euros. However, the maximum liability assumed by the “German Nuclear Reactor Insurance Association” amounts to only 256 million euros. The 17 German nuclear power plants’ insurance premiums would be less than 20 million euros a year. In the event of an accident, the four operators provided a further up to 2.25 billion euros as part of mutual insurance. There is a clear gap here. If an insurer wanted to build up sufficient capacity for a nuclear power plant within 50 years (for example, for the remaining life of a kiln), it would have to charge 72 billion euros per year for liability, otherwise, it would not be able to bear the risk.

Profitability: Digitization makes possible what has not been worthwhile up to now

Another reason why there is no insurance coverage for some risks is the high marginal costs in the current administration context. However, these are more risks that cannot be ensured from a business point of view, not because of the threat itself. Here, however, there is the possibility of further reducing these through advancing digitization. In this regard, there are great hopes, among other things, in the area of ​​blockchain, which can be used to map smart contracts. Using these smart contracts, benefits for certain insurance companies can in principle be paid in real time without the intervention of an officer so that if a predefined loss event occurs, which can be tracked using publicly available information, they can be paid almost free of charge.


In summary, it can be said that current social trends, such as the sharing economy, digitization, and the Internet of Things, call into question the traditional principles of the insurability of risks. However, like so much else, this is a double-edged sword. For example, while some view cyber risks as potentially uninsurable due to increased networking and associated dependence of systems, peer-to-peer models and the possibility of securitization of risks in the capital market may propose risks that were previously insured in the future. However, the entire industry should constantly strive to explore the limits of insurability in order to continue to be future-proof.

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