Finance

A risk is said to be insurable only if it meets the prerequisites of an insurable risk. An insurable risk should be fortuitous and definable. Insurable risk should also have the premium that is paid by the insured being commensurate with the potential loss and the known exposures of the risk should be large in number and be similar. A risk that does not meet any of these prerequisites of insurable risk is considered to be uninsurable and therefore cannot be covered by the insurer. This paper discusses the insurable risk from the perspective of insurance companies by analyzing whether reputation decline risk meets the requirements of insurable risk. This is done through a case study of DeWitt Sterm, a US insurance broker who has been reported on December 16, 2009, by the Financial Times to be launching a product corporation against losses resulting from high profile spokespersons reputation decline such as Tiger Woods.

The risk of loss of reputation does not meet the insurable risk prerequisite of a large number of similar risk exposures and is therefore not an insurable risk. This is because the number of high profile person suffering from reputation decline is few. There is also no similarity in this risk exposure because peoples reputation decline because of none-homogeneous risk exposures. Some peoples reputation decline because of being involved in scandals, others it is because of financial instability, while for some it is because the services that they were offering to the clients are of low quality (Vaughan, 1997).

There is no definite loss when it comes to loss of reputation and therefore the risk is not insurable. The reason is that it is not clear enough why such high profile spokespersons like Tiger Wood have a decline in reputation. This risk is considered not to be definite because it dose not have a specific cause and you cannot be able to tell at what specific time the loss can be said to have occurred. Decline in reputation does not have a calculable loss and is thus not an insurable risk. It is not easy to quantify how much the reputation of a given person has declined (Margaret, 1992).

Decline in reputation is accidental and therefore the risk is insurable based on this criterion. This is because the risk is as a result of events that are fortuitous and therefore outside the control of the person whose reputation is declining. The loss suffered as a result of decline in reputation is not so large and therefore based on this criterion the risk is insurable. The insurance premiums to be charged can cover the cost of issuing the policy as well as the expected cost of loss. The premiums to be paid for covering this risk are affordable and therefore the risk is considered to be insurable based on this criterion. Decline in reputation is not catastrophic and therefore based on this criterion the risk can be considered to be insurable. The reason is that this risk is not likely to occur to a large number of the insured at the same time, a situation that would make it difficult for the insurance company to make compensation (Dickson, 1960).
 
From the above discussion it is clear that while decline in reputation meets some of the prerequisites for insurable risk, it does not meet others. Since any insurable risk must meet the entire prerequisites of an insurable risk, then decline in reputation is not an insurable risk.