Uninsurable risk: Difference between revisions
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'''Uninsurable [[risk]]''' is a situation that is related to unknowable or unacceptable risk or is against the law. Such a risk can be very dangerous for [[insurance]] [[company]], thus those companies try to avoid insuring uninsurable risk. | '''Uninsurable [[risk]]''' is a situation that is related to unknowable or unacceptable risk or is against the law. Such a risk can be very dangerous for [[insurance]] [[company]], thus those companies try to avoid insuring uninsurable risk. | ||
When uninsurable risk is related to an investment that is important for society or country, the [[government]] can give guarantees that are kind of insurance. That helps to make some large [[investments]]. | When uninsurable risk is related to an [[investment]] that is important for society or country, the [[government]] can give guarantees that are kind of insurance. That helps to make some large [[investments]]. | ||
Law can forbid some types of insurance, e.g. for criminal penalties. Other uninsurable risks are: | Law can forbid some types of insurance, e.g. for criminal penalties. Other uninsurable risks are: | ||
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* political risk | * political risk | ||
* pandemic risk | * pandemic risk | ||
[[File:uninsurable_risk.png|400px|right|thumb|Fig.1. Uninsurable risk]] | |||
==Risk to reputation== | ==Risk to reputation== | ||
'''Reputation risk''' - is a threat to the [[organization]]. It can occur in everyday operations related to the [[project]] and difficulties in the company's development plans. Loss of reputation affects [[competitiveness]], weakness the company's dynamism and reduces the value of developing investments.Reputational risk applies not only to individual organizations but it can affect the entire [[industry]]. Reputation risk is a threat to the good name or position of the company. Reputation risk may occur as a result of the actions of the company itself, employees or other entities related to the company. Companies [[need]] to be responsible and consciously managed to avoid or minimize the risk of losing reputation <ref>O’Callaghan, T. (2007). 105-110</ref>. | '''Reputation risk''' - is a threat to the [[organization]]. It can occur in everyday operations related to the [[project]] and difficulties in the company's development plans. Loss of reputation affects [[competitiveness]], weakness the company's dynamism and reduces the value of developing investments.Reputational risk applies not only to individual organizations but it can affect the entire [[industry]]. Reputation risk is a threat to the good name or position of the company. Reputation risk may occur as a result of the actions of the company itself, employees or other entities related to the company. Companies [[need]] to be responsible and consciously managed to avoid or minimize the risk of losing reputation <ref>O’Callaghan, T. (2007). 105-110</ref>. | ||
==Regulatory risk== | ==Regulatory risk== | ||
'''Regulatory risk''' - is the risk of losses resulting from changes in laws and regulations. Organizations must stabilize investment prices to reduce anti-competitive [[behavior]]. The change of regulations may affect the [[market]], sector and security. Regulatory risk may first and foremost appear in the offer of services and products in which companies may get involved. It may result from events such as a change in rates that may encumber or that may hinder business operations. New laws and regulations can greatly impact the value of shares of the company. The company which is facing high compliance costs may see its stock [[price]] fall <ref>Larsen E. R., & Bunn D. W. (1999). 12-15</ref>. | '''Regulatory risk''' - is the risk of losses resulting from changes in laws and regulations. Organizations must stabilize investment prices to reduce anti-competitive [[behavior]]. The change of regulations may affect the [[market]], sector and security. Regulatory risk may first and foremost appear in the offer of services and products in which companies may get involved. It may result from events such as a change in rates that may encumber or that may hinder business operations. New laws and regulations can greatly impact the value of shares of the company. The company which is facing high compliance costs may see its stock [[price]] fall <ref>Larsen E. R., & Bunn D. W. (1999). 12-15</ref>. | ||
==Trade secret risk== | ==Trade secret risk== | ||
'''Trade risk''' - is the risk related to buyers, the financial situation on the market, payment habits and honesty in fulfilling the obligations arising from the sales contract.Exporters and importers engage in trade and are exposed to significant risks. For the purpose of mitigation, contractors can offer import and export guarantees with an additional fee. The market and [[competition]] forces companies to offer more and more favorable terms of cooperation and to extend payment deadlines, which results in an increase in [[commercial risk]] and delays in payment and delivery or in its [[absence]] <ref>Niepmann, F., & Schmidt-Eisenlohr T. (2014). 1-5</ref>. | '''Trade risk''' - is the risk related to buyers, the financial situation on the market, payment habits and honesty in fulfilling the obligations arising from the sales contract.Exporters and importers engage in trade and are exposed to significant risks. For the purpose of mitigation, contractors can offer import and export guarantees with an additional fee. The market and [[competition]] forces companies to offer more and more favorable terms of cooperation and to extend payment deadlines, which results in an increase in [[commercial risk]] and delays in payment and delivery or in its [[absence]] <ref>Niepmann, F., & Schmidt-Eisenlohr T. (2014). 1-5</ref>. | ||
==Political risk== | ==Political risk== | ||
'''Political risk''' - is a risk when return on investment may suffer as a result of political changes or instability in the country. This may be due to changes in the government, political [[system]] and legislative bodies. The state is a source of sudden and unexpected changes in financial flows and may affect the market value of implemented investments. Before making the investment, the company should conduct research on the country's risk. This will help to estimate in which countries there is a high political risk not to trigger unnecessary operations in these countries <ref>Tabellin, A. A. G. (1989). 1-6</ref>. | '''Political risk''' - is a risk when [[return on investment]] may suffer as a result of political changes or instability in the country. This may be due to changes in the government, political [[system]] and legislative bodies. The state is a source of sudden and unexpected changes in financial flows and may affect the market value of implemented investments. Before making the investment, the company should conduct research on the country's risk. This will help to estimate in which countries there is a high political risk not to trigger unnecessary operations in these countries <ref>Tabellin, A. A. G. (1989). 1-6</ref>. | ||
==Pandemic risk== | ==Pandemic risk== | ||
'''Pandemic risk''' - is a rapidly spreading infectious disease that can be a global threat. Pandemics can create social and economic chaos. They disrupt business operations, supply operations, resulting in a shortage of employees. This makes it difficult to provide products and services to customers.The disease is a high risk of morbidity and mortality.Risk [[management]] involves the use of emergency plans in society in order to mitigate the impact on health and the economy. Governments should deal with the estimation of public obligations to manage conditional obligations.It is important to determine how the company intends to react to the situation and define the rules for the management of personnel and [[communication]] <ref>Jonas, O. B. (2013). 10-16</ref>. | '''Pandemic risk''' - is a rapidly spreading infectious disease that can be a global threat. Pandemics can create social and economic chaos. They disrupt business operations, supply operations, resulting in a shortage of employees. This makes it difficult to provide products and services to customers.The disease is a high risk of morbidity and mortality.Risk [[management]] involves the use of emergency plans in society in order to mitigate the impact on health and the economy. Governments should deal with the estimation of public obligations to manage conditional obligations.It is important to determine how the company intends to react to the situation and define the rules for the management of personnel and [[communication]] <ref>Jonas, O. B. (2013). 10-16</ref>. | ||
==Limitations of Uninsurable risk== | |||
A limitation of uninsurable risk is that it can be difficult to identify and quantify. Furthermore, there are certain risks that are deemed too risky to insure and thus must be accepted as uninsurable. These risks often include activities that are illegal, involve extreme risks, or are unpredictable. Additionally, some types of risks may be too expensive to insure, or the insurance company may not have the resources to cover the risk. Lastly, uninsurable risk may be too difficult for the insurer to monitor, which can lead to a lack of control over the situation. | |||
==Other approaches related to Uninsurable risk== | |||
In addition to avoiding uninsurable risk, there are other approaches that insurance companies can take: | |||
* '''Risk Avoidance''': Insurance companies can attempt to avoid uninsurable risks by refusing to offer coverage, or by providing coverage with certain exclusions or limitations. | |||
* '''Risk Transfer''': Insurance companies can also attempt to transfer uninsurable risk to another party. This could be done through reinsurance, a contract between two or more insurance companies, or by [[outsourcing]], where the risk is transferred to a third-party provider. | |||
* '''Risk Sharing''': Insurance companies can also share the risk with other companies. This could be done through a risk pool, where a group of companies pool their resources to cover losses from uninsurable risks. | |||
* '''Risk Management''': Insurance companies can also use various [[risk management]] techniques, such as risk assessment, risk control, and risk [[financing]], to manage uninsurable risks. | |||
In conclusion, insurance companies can use a variety of approaches to manage uninsurable risk, such as avoidance, transfer, sharing and management. By doing so, they can protect themselves from the potential losses that come with uninsurable risks. | |||
{{infobox5|list1={{i5link|a=[[Transfer risk]]}} — {{i5link|a=[[Supply chain risk]]}} — {{i5link|a=[[Operational impact]]}} — {{i5link|a=[[Examples of threats]]}} — {{i5link|a=[[Specific risk]]}} — {{i5link|a=[[Pure risk]]}} — {{i5link|a=[[Opportunities and threats]]}} — {{i5link|a=[[Barriers to exit]]}} — {{i5link|a=[[Total risk]]}} }} | |||
==References== | ==References== | ||
* Jaffee, D. M., & Russell, T. (1997). ''[https://www.jstor.org/stable/pdf/253729.pdf?casa_token=aJUVn3PuRNcAAAAA:2PG-a1hMzLSktoCzyIMKcd62hEm5xz3Jez2pYuNdiXIzXyI70-tygQcDM1h__SmyZGuAcfF9kdz767eDRIga2tRF1drpsvak5X-0ehGMrQxWtDazGA1V Catastrophe insurance, capital markets, and uninsurable risks]''. Journal of Risk and Insurance, 205-230. | * Jaffee, D. M., & Russell, T. (1997). ''[https://www.jstor.org/stable/pdf/253729.pdf?casa_token=aJUVn3PuRNcAAAAA:2PG-a1hMzLSktoCzyIMKcd62hEm5xz3Jez2pYuNdiXIzXyI70-tygQcDM1h__SmyZGuAcfF9kdz767eDRIga2tRF1drpsvak5X-0ehGMrQxWtDazGA1V Catastrophe insurance, capital markets, and uninsurable risks]''. Journal of Risk and Insurance, 205-230. | ||
* Jonas, O. B. (2013). [https://openknowledge.worldbank.org/bitstream/handle/10986/16343/WDR14_bp_Pandemic_Risk_Jonas.pdf?sequence=1 ''Pandemic risk'']. The [[World Bank]] | * Jonas, O. B. (2013). [https://openknowledge.worldbank.org/bitstream/handle/10986/16343/WDR14_bp_Pandemic_Risk_Jonas.pdf?sequence=1 ''Pandemic risk'']. The [[World Bank]] | ||
* Larse, E. R., & Bunn D. W. (1999). [https://www.osti.gov/etdeweb/servlets/purl/357234 ''Deregulation in the electricity | * Larse, E. R., & Bunn D. W. (1999). [https://www.osti.gov/etdeweb/servlets/purl/357234 ''Deregulation in the electricity sector: understanding strategic and regulatory risk'']. Journal of the [[Operational research]] Society | ||
* Niepmann, F., & Schmidt-Eisenlohr T. (2014). [https://www.econstor.eu/bitstream/10419/96852/1/cesifo_wp4761.pdf ''International trade, risk and the role of banks'']. Cesifo Working Paper, No. 4761 | * Niepmann, F., & Schmidt-Eisenlohr T. (2014). [https://www.econstor.eu/bitstream/10419/96852/1/cesifo_wp4761.pdf ''International trade, risk and the role of banks'']. Cesifo Working Paper, No. 4761 | ||
* O'Callaghan, T. (2007). [https://www.researchgate.net/profile/Terry_Ocallaghan/publication/233177707_Disciplining_Multinational_Enterprises_The_Regulatory_Power_of_Reputation_Risk/links/540821490cf23d9765ae4189/Disciplining-Multinational-Enterprises-The-Regulatory-Power-of-Reputation-Risk.pdf ''Disciplining multinational enterprises: the regulatory power of reputation risk'']. Global Society, Vol. 21 | * O'Callaghan, T. (2007). [https://www.researchgate.net/profile/Terry_Ocallaghan/publication/233177707_Disciplining_Multinational_Enterprises_The_Regulatory_Power_of_Reputation_Risk/links/540821490cf23d9765ae4189/Disciplining-Multinational-Enterprises-The-Regulatory-Power-of-Reputation-Risk.pdf ''Disciplining multinational enterprises: the regulatory power of reputation risk'']. Global Society, Vol. 21 | ||
* Tabellini, A. A. G. (1989). [https://dash.harvard.edu/bitstream/handle/1/4553019/alesina_externaldebt.pdf?seq ''External debt, capital flight and political risk'']. Journal of International [[Economics]] | * Tabellini, A. A. G. (1989). [https://dash.harvard.edu/bitstream/handle/1/4553019/alesina_externaldebt.pdf?seq ''External debt, capital flight and political risk'']. Journal of International [[Economics]] | ||
== Footnotes == | ==Footnotes== | ||
<references/> | <references/> | ||
{{a|Weronika Góra}} | {{a|Weronika Góra}} | ||
[[Category:Risk management]] | [[Category:Risk management]] | ||
Latest revision as of 06:29, 18 November 2023
Uninsurable risk is a situation that is related to unknowable or unacceptable risk or is against the law. Such a risk can be very dangerous for insurance company, thus those companies try to avoid insuring uninsurable risk.
When uninsurable risk is related to an investment that is important for society or country, the government can give guarantees that are kind of insurance. That helps to make some large investments.
Law can forbid some types of insurance, e.g. for criminal penalties. Other uninsurable risks are:
- risk to reputation
- regulatory risk
- trade secret risk
- political risk
- pandemic risk
Risk to reputation
Reputation risk - is a threat to the organization. It can occur in everyday operations related to the project and difficulties in the company's development plans. Loss of reputation affects competitiveness, weakness the company's dynamism and reduces the value of developing investments.Reputational risk applies not only to individual organizations but it can affect the entire industry. Reputation risk is a threat to the good name or position of the company. Reputation risk may occur as a result of the actions of the company itself, employees or other entities related to the company. Companies need to be responsible and consciously managed to avoid or minimize the risk of losing reputation [1].
Regulatory risk
Regulatory risk - is the risk of losses resulting from changes in laws and regulations. Organizations must stabilize investment prices to reduce anti-competitive behavior. The change of regulations may affect the market, sector and security. Regulatory risk may first and foremost appear in the offer of services and products in which companies may get involved. It may result from events such as a change in rates that may encumber or that may hinder business operations. New laws and regulations can greatly impact the value of shares of the company. The company which is facing high compliance costs may see its stock price fall [2].
Trade secret risk
Trade risk - is the risk related to buyers, the financial situation on the market, payment habits and honesty in fulfilling the obligations arising from the sales contract.Exporters and importers engage in trade and are exposed to significant risks. For the purpose of mitigation, contractors can offer import and export guarantees with an additional fee. The market and competition forces companies to offer more and more favorable terms of cooperation and to extend payment deadlines, which results in an increase in commercial risk and delays in payment and delivery or in its absence [3].
Political risk
Political risk - is a risk when return on investment may suffer as a result of political changes or instability in the country. This may be due to changes in the government, political system and legislative bodies. The state is a source of sudden and unexpected changes in financial flows and may affect the market value of implemented investments. Before making the investment, the company should conduct research on the country's risk. This will help to estimate in which countries there is a high political risk not to trigger unnecessary operations in these countries [4].
Pandemic risk
Pandemic risk - is a rapidly spreading infectious disease that can be a global threat. Pandemics can create social and economic chaos. They disrupt business operations, supply operations, resulting in a shortage of employees. This makes it difficult to provide products and services to customers.The disease is a high risk of morbidity and mortality.Risk management involves the use of emergency plans in society in order to mitigate the impact on health and the economy. Governments should deal with the estimation of public obligations to manage conditional obligations.It is important to determine how the company intends to react to the situation and define the rules for the management of personnel and communication [5].
Limitations of Uninsurable risk
A limitation of uninsurable risk is that it can be difficult to identify and quantify. Furthermore, there are certain risks that are deemed too risky to insure and thus must be accepted as uninsurable. These risks often include activities that are illegal, involve extreme risks, or are unpredictable. Additionally, some types of risks may be too expensive to insure, or the insurance company may not have the resources to cover the risk. Lastly, uninsurable risk may be too difficult for the insurer to monitor, which can lead to a lack of control over the situation.
In addition to avoiding uninsurable risk, there are other approaches that insurance companies can take:
- Risk Avoidance: Insurance companies can attempt to avoid uninsurable risks by refusing to offer coverage, or by providing coverage with certain exclusions or limitations.
- Risk Transfer: Insurance companies can also attempt to transfer uninsurable risk to another party. This could be done through reinsurance, a contract between two or more insurance companies, or by outsourcing, where the risk is transferred to a third-party provider.
- Risk Sharing: Insurance companies can also share the risk with other companies. This could be done through a risk pool, where a group of companies pool their resources to cover losses from uninsurable risks.
- Risk Management: Insurance companies can also use various risk management techniques, such as risk assessment, risk control, and risk financing, to manage uninsurable risks.
In conclusion, insurance companies can use a variety of approaches to manage uninsurable risk, such as avoidance, transfer, sharing and management. By doing so, they can protect themselves from the potential losses that come with uninsurable risks.
| Uninsurable risk — recommended articles |
| Transfer risk — Supply chain risk — Operational impact — Examples of threats — Specific risk — Pure risk — Opportunities and threats — Barriers to exit — Total risk |
References
- Jaffee, D. M., & Russell, T. (1997). Catastrophe insurance, capital markets, and uninsurable risks. Journal of Risk and Insurance, 205-230.
- Jonas, O. B. (2013). Pandemic risk. The World Bank
- Larse, E. R., & Bunn D. W. (1999). Deregulation in the electricity sector: understanding strategic and regulatory risk. Journal of the Operational research Society
- Niepmann, F., & Schmidt-Eisenlohr T. (2014). International trade, risk and the role of banks. Cesifo Working Paper, No. 4761
- O'Callaghan, T. (2007). Disciplining multinational enterprises: the regulatory power of reputation risk. Global Society, Vol. 21
- Tabellini, A. A. G. (1989). External debt, capital flight and political risk. Journal of International Economics
Footnotes
Author: Weronika Góra
