What is an Uninsurable Peril?
Uninsurable risk is incidents or circumstances not covered by insurance or for which insurance companies are unable to provide policies. Usually, an uninsurable hazard is something that has a high risk of occurrence, meaning the insurance company's likelihood of payment is high and anticipated. Perils which are not contained in nature are usually catastrophic.
An example of an uninsurable danger would be if a person were to build a home in an area known to have flooded. Since the region has a history of the specific danger (i.e. a flood) occurring, an insurance company is unlikely to want to add flood coverage due to the difficulty of handling the potential risk. It is the reason why flood insurance exists as a policy of the national government.
When Insurance Won't Work?
Reputational risk arises when a business does something, or something happens to a business, that damages its reputation and disadvantages the public to the point where its business is in danger.
For example, a company's CEO is embroiled in a sexual harassment scandal, or someone accidentally puts poison in a company product's bottles. There may be some compensation for product recall costs, but such cases usually cannot be covered because an insurer cannot decide what the risk is and what it is worth.
Regulatory risk is the likelihood of a government agency doing something, or a government passing a law that would severely damage a company—for instance, forcing electric generators powered by coal to close.
Every year there are thousands of new rules and laws posted at state, local, and federal level. An insurer cannot foresee these or write a policy to mitigate the damage to a client that results from them.
Trade secrets are important to many companies, yet the harm is hard to calculate if they are leaked or stolen. A hacker may steal key computer code; a disgruntled employee may use hidden formulas or procedures to walk off. Predicting how likely that is to happen or how much harm it causes is beyond most insurers' capacity and reach.
