Page 286 - IC38 GENERAL INSURANCE

At some future date its value becomes nil. This is a natural process and we
discard or change our mobiles, our washing machines and our clothes when they
are worn out. Therefore losses arising out of normal wear and tear are not
covered in insurance.

i. Exposure to risk: Occurrence of a peril need not necessarily lead to a
loss. A person staying in Mumbai does not suffer any loss due to a flood
in coastal Andhra. For loss to happen the asset must be exposed to the
peril.

Example

In giving protection against a car accident, an insurer would be interested in a
population of cars that are „exposed to the peril called accident‟ during a
certain year. A car regularly used for racing purposes cannot be part of this
population. It must form part of a separate group of „racing cars‟ whose chances
of accident are higher than ordinary cars.

Exposure to risk alone is not enough ground for insurance compensation.

Example

A fire may break out in factory premises without causing actual damage.

Insurance comes into play only if there is an actual economic (financial) loss
as a result of a peril.

ii. Degree of risk exposure: Two assets may be exposed to the same peril
but the likelihood of loss or the amount of loss may vary greatly.

Example

A vehicle carrying explosives can yield far greater loss from fire than tanker
carrying water.

Similarly, the probability of a person having a respiratory problem is high in a
polluted city or the individual engaged in horse racing has a higher risk of
accidental injury than one who sits in a shop.

Insurers are mainly concerned with the degree of risk exposure. When it is very
high we say that it is a bad risk.

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