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Chapter D4 Homogeneous exposures

A sufficient number of exposures to similar risks, historical patterns and trends will enable an insurer to
forecast objectively the expected extent of future losses. In the absence of a large number of
homogeneous exposures (i.e. similar risks) the task is harder, as a pattern is more difficult to determine.
In extreme cases where there is no historical data, the risk becomes a subjective one from an insurer’s
point of view.
Whereas ‘fortuitous loss’, ‘insurable interest’ and not being against ‘public policy’ are absolute
requirements, the concept of homogeneous exposures is an ideal. There are occasions when an insurer
will need to use less than fully reliable historical data when setting premiums.

Some insurance markets such as the UK insurance market are renowned for their ability to insure almost
any risk, such as the fingers of a famous pianist. Similarly, insurance is available for satellite launches,
even though instances of such launches are fairly infrequent and any failure is catastrophic. However,
wherever possible, an insurer looks for homogeneous exposures in order to utilise as fully as possible
the law of large numbers. The greater the number of similar risks to insure, the closer the actual outcome
will be to what was expected in terms of losses.

D5 Summary of insurable and uninsurable risks

From what we have seen in the previous sections we can summarise risks that are generally insurable
and those that are not as follows:

Insurable risks Uninsurable risks
Financial Non-financial
Pure Speculative
Particular Fundamental (generally)
Fortuitous event Deliberate act
Insurable interest No insurable interest Reference copy for CII Face to Face Training

Not against public policy Against public policy
Homogeneous exposures One-offs (generally)

E Components of risk

In order to gain a deeper understanding of the meaning of risk, we must now take a closer look at the
various components, which include:

• uncertainty;
• level of risk; and
• peril and hazard.

E1 Uncertainty

Uncertainty implies doubt about the future as a result of incomplete knowledge; this is at the very core
Uncertainty is at the
very core of the of the concept of risk because if we know what is going to happen there is no element of risk involved. If
concept of risk you know that your house will burn down at 4.00pm tomorrow, or that on the way home you will have an
accident in the car, there is no risk of the event happening; the event would become a certainty. As we
do not have this prior knowledge, we can say that we live in an uncertain or risky environment and that
risk exists separately from the individual.
Even in the context of life assurance there is uncertainty. We know that we will all die; the uncertainty
relates to when that will be.

E2 Level of risk

The second aspect of risk relates to the different levels that exist. We know that there is a greater
likelihood of some things happening than others and this is what is meant by the level of risk involved.
Risk is usually assessed in terms of frequency (how often it will happen) and severity (how serious it will
be if it does happen); these are the measurement criteria used in the risk management process.