Definition of Uninsurable Peril

Uninsurable peril are events for which insurance coverage is not available or for which insurers are unlikely to underwrite policies. An uninsurable peril is typically an event that has a high risk of occurrence, meaning the probability of a payout is high and expected. Perils that insurers are unwilling to cover are often catastrophic in nature.

Breaking Down Uninsurable Peril

An example of an uninsurable peril would be if an individual builds a home in a known flood area. Because the area has a history of that particular peril, it is unlikely an insurance company will want to extend flood coverage because of the difficulty in managing the potential risk. It's the reason why flood insurance exists as a government program managed by the Federal Emergency Management Agency (FEMA).

When Insurance Won't Work

The major areas where insurance is unobtainable include reputational risk, regulatory risk, trade secret risk, political risk and pandemic risk.

Reputational risk occurs when a company does something, or something happens to a company, that damages its public image to the point where its business is imperiled. For example, a CEO is involved in a sexual harassment scandal, or someone is randomly placing poison in bottles of a company's product. There may be some coverage (for product recall expenses, for example). But generally these situations cannot be insured because an insurer cannot determine what the risk is and what it's worth.

Regulatory risk is the possibility a government agency will do something, or a government will pass a law, that severely damages a business. For example, forcing coal-powered electric generators to close. Thousands of new rules and laws are posted at the state, local and federal level every year. It's impossible for an insurer to anticipate these or write a policy to mitigate the damage to a company stemming from them.

Trade secrets are essential to many companies, yet if they are exposed or stolen the damage is hard to calculate. A hacker can steal key computer code. A disgruntled employee can walk off with secret formulas or processes. Predicting how likely this is to happen or the amount of damage is beyond the ability and scope of most insurers.

Political risks such as government expropriation of an asset, war or political violence, credit default of trade receivables, or when foreign governments block transfer of currency and assets, are difficult to insure against because they as so unpredictable. The same is true of pandemics. Mass sickness caused by flu or viruses can disrupt a business, but insurance can't help.