Definition - What does Risk Equivalent mean?
Risk equivalent can refer either to the amount of money that will cover a risk or to a health complication that can result from a lifestyle or current health condition. The latter can raise the premium for a policy.
Insuranceopedia explains Risk Equivalent
Actuaries working for insurance companies calculate risk equivalents to figure out the amount of money their company will lose by covering a particular risk.
A risk equivalent may also be a health condition or lifestyle that makes a person vulnerable to a serious illness in the future. For example, there are studies that suggest that people with diabetes are prone to heart disease, while smokers are prone to lung disease. These susceptibilities are factored into an insurance company's assessment of the risk they take on board by insuring people with these habits or health conditions.
This is why insurance representatives usually ask health insurance applicants lifestyle questions, such as whether they are smokers. The answers to these questions, along with the current health profile of the applicant, determine the amount of the premium.
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