Julia, who has renters insurance in Plano, TX, wrote to the renters insurance experts to ask,
What is risk in renters insurance? I’ve heard the term before and I know the definition of risk, but I’m not sure how it applies to renters insurance.
Julia, that’s a fantastic question and one that not many people think to ask. Let’s take a look.
What Are Renters Insurance Risks?
What are renters insurance risks? How can I lessen those risks? If I allow risk to exist, does it affect my ability to make a claim on my renters insurance?
Julia, to understand what risk is in regards to renters insurance, you have to divide it up into a few different categories. First, we’ll treat risk generally and then see how each type applies to renters insurance. It’s much easier to comprehend that way, rather than trying to give you the five minute version of a senior level risk management course. So what is risk in renters insurance and what are the types of risks?
What Is Risk In Renters Insurance? Insurable Risk Vs. Uninsurable Risk
The two broadest categories of risk are insurable risk and uninsurable risk. That’s pretty self-explanatory. While the term is occasionally used too broadly, uninsurable risk means something that you cannot or may not insure. Perhaps you cannot insure because no one is willing to take on the risk. For example, you cannot insure against the risk of the Super Bowl happening this year, because the probability of the event happening approaches 100%. You’re not likely to find anyone to underwrite the risk of the Super Bowl happening this year. That’s an example of an uninsurable risk. Other uninsurable risks include things that are illegal in the location of the insurer or of the insured. Due to the potential legal ramifications, insuring any illegal activity could be construed as a contribution to that illegal activity.
What Is Risk In Renters Insurance? Pure Risk
There are several broad categories into which types of risk can be placed. The first one we’ll look at is called pure risk. Pure risk is a situation where there may or may not be a loss, but there can be no gain. A building may or may not burn down during a given policy period. If the building burns down and there is a loss, than the insurance company pays for that loss. On the other hand, if the building remains undamaged by fire during the policy period, neither the insurer nor the owner of the building can make any gain off the fact that the risk was not realized. Pure risk is insurable because actuaries and underwriters can use historical data and mathematical formulas to figure out how likely losses might be and price the policy accordingly. Generally, risk that occurs outside of the insurance field is typically referred to as pure risk.
And How Risk In Renters Insurance Is Further Categorized And Insured.
What Is Risk In Renters Insurance? Personal Risk
Personal risks are those which have a direct impact on an individual, such as health insurance. In terms of health or life insurance, the individual is what the rating is based on. This is predictable to a large degree, in the same way as any pure risk. Another example of insuring a personal risk would be disability insurance. This type of insurance can be rated based on one’s career and hobbies and their likely impact on health and life.
What Is Risk In Renters Insurance? Property Risk
Property risk is a risk that affects either personal property or real estate. Car accidents and gas line explosions are examples of property risk. Property risks are insurable because the chances are calculable and the policy can be priced accordingly. In fact, one would generally have a difficult time purchasing or holding certain types of property, such as real estate or a car, without insuring against these risks.
Property risk can be further subdivided into direct and indirect losses. Direct losses is the actual loss or damage resulting from the event that preceded the loss. An example of direct physical loss would be damage to a vehicle as a result of an accident. Indirect or consequential losses are losses caused by the original loss, not directly by the event leading to the loss. The cost of staying in a hotel because you had a house fire is an indirect loss, whereas the damage to the home from the fire itself would be a direct loss.
What Is Risk In Renters Insurance? Legal Risk And Liability Risk
Legal risk is a subset of personal risk. It’s the chance that you might be sued by another person, cause injury to them, or be obligated to repair any of their damaged property. Legal risk is the chance of being held responsible for that injury or damage. By insuring to avoid legal risk you’re generally insuring not only the risk of loss from a judgment or settlement against you, but also the risk of loss from the costs of defending against that suit.
What Is Risk In Renters Insurance? What It’s Not: Speculative Risk
Speculative risk is the type of risk where there is a chance for profit. Obvious examples of this would be investments and gambling. This is not found in insurance, nor is it an insurable risk, because of the potential for gain. Actually, the clearer way to address the aforementioned would be that speculative risk is not found in personal insurance. The credit default swaps that brought down Bear Sterns, and the mortgage backed securities that nearly destroyed the American economy are forms of insurance in their own right. But insuring that sort of risk on a personal policy is simply unheard of. If it were available, every gambler in Las Vegas would be insuring the capital they start with in order to reduce the risk of loss and increase the chance of gain. That obviously wouldn’t be financially sustainable for the insurer.
What Is Risk In Renters Insurance? Uninsurable Moral Hazards
Certain situations are not insurable risks because of the moral hazard. A moral hazard is when the insured would be better off if they experienced a claim. An example of this is the person that buys home insurance on a house one week before they plan to tear it down to build a new house.