Insurance Risk

Updated: 29 February 2024

What Does Insurance Risk Mean?

An insurance risk is a threat or peril that the insurance company has agreed to insure against in the policy wordings. These types of risks or perils have the potential to cause financial loss such as property damage or bodily injury if it were to occur.

If the insured event takes place and a claim is filed, the insurance company has to pay the policyholder the agreed reimbursement amount.

Examples of insurance risks include the risk of fire, earthquake losses, or even liability when an insured is found responsible for causing bodily injury, death, or property damage to 3rd parties.

The more risks your insurance provider agrees to insure, the more comprehensive—and therefore expensive—your policy will be.

The best policies are the ones that cover the most relevant insurance risks you might face at the most reasonable cost.

Insuranceopedia Explains Insurance Risk

Put simply, insurance risks are risks or perils that the insurance company has agreed to provide indemnity for. There are a wide range of events that are considered insurance risks. For example, an auto accident is an auto insurance risk, a policyholder’s death is a life insurance risk, and water damage is a homeowner’s insurance risk.

Insurance premiums are calculated based on three factors:

  • The chance that a certain insurance risk will be realized.
  • The severity of the damage if the insurance risk is realized.
  • The number of risks the insurer is assuming liability for.

The greater the chance of the risk occurring, the higher the premiums will tend to be. A driver with a history of accidents or traffic violations, for instance, will be viewed as a higher risk to the insurer so will be charged more for auto insurance coverage.

Another factor insurance companies look at when determining premiums is the severity of the risk if it were to occur. In most cases, policies covering potentially catastrophic risks like flood or earthquake will be more expensive than those covering more common risks like theft. This is because earthquake or flood losses are likely to cause greater financial loss than a theft incident.

The amount of insurance risks the policy is covering also plays a big role. A policy that offers coverage for a greater number of perils or risks will be more expensive than one that does not cover as many. This is because the probability that the policy will need to respond to pay is greater.

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