What is Uninsurable Risk?

Uninsurable risk is a situation in which no insurer is willing to provide coverage. Taking on an uninsurable risk would otherwise put an insurer at risk of very large payouts that could threaten its solvency. When a risk is uninsurable, a company either restructures its business to avoid the risk or creates a reserve to cover any losses that may arise.

Examples of Uninsurable Risk

There are several situations that can give rise to uninsurable risk. For example, the amount of risk is too difficult to quantify, or the cost of the insurance would be too great, or incidents causing losses are expected to be quite frequent, or providing coverage is illegal, such as reimbursing for an illegal act. Thus, rocket attacks in the Red Sea by local rebel forces would causes insurers to stop providing insurance to freighters traversing the Red Sea, on the grounds that the risk of loss is both frequent and very high.