What types of risk are most commonly covered by insurance?

Insurance typically covers high impact, low frequency risks because these risks can lead to significant financial losses, making it crucial for individuals and businesses to have protection against them. High impact risks, such as natural disasters, serious accidents, or catastrophic events, while less frequent in occurrence, can result in substantial claims that would be difficult for a policyholder to absorb financially without insurance.

Insurers are able to manage their exposure to these risks through various strategies such as diversification and reinsurance, allowing them to provide coverage for events that, while rare, can have devastating consequences. Additionally, the pricing of insurance products is often based on the assessment of these risks, where higher potential costs to the insurer are balanced by lower incidence rates.

Other types of risks listed may not align as closely with standard insurance coverage principles. For instance, low impact, high frequency risks tend to be more manageable and often are not insured against since the costs associated with them are typically low and frequent, making it more economical for individuals to self-insure. Medium impact, variable frequency risks can complicate underwriting processes and may not fit neatly into standard insurance products. High impact and high frequency risks can lead to unmanageable losses for insurers, impacting their overall financial stability.