Along with the advantages, there are various drawbacks as well for general insurance. The drawbacks include:
Does not ‘reduce’ risk: General insurance is only a risk transfer mechanism, but that does not mean that the chances of the loss arising have reduced.
Moral Hazard: Once the individual gets the asset insured, he might become ignorant towards its safety. In cases where the insured didn’t take appropriate measures to safeguard the asset, the insurance company may even refuse compensation.
The complexity of contract: The insurance policy is a detailed document containing various terms and conditions, which a layman might not understand, hence, he might land up purchasing a policy at unfavourable terms.
Policy Limit: The insured shall receive only the amount of policy limit or the amount of actual loss, whichever is lower. In case the loss is greater than the policy limit, the individual will not be compensated for that higher amount.
Volatility: Volatility arising due to market crashes may affect big corporations, and they might not be able to honour their commitment during such times.
Wastage of resources: An individual has to pay hefty sums as premiums for the policy, but he might never be able to make a claim, in case financial loss due to a covered event does not arise.