Risk Equivalent
What Does Risk Equivalent Mean?
Risk equivalent can refer to either the amount of money required to cover a risk or to a health complication that may arise from a lifestyle choice or existing health condition. The latter can result in a higher premium for a policy.
Insuranceopedia Explains Risk Equivalent
Actuaries working for insurance companies calculate risk equivalents to determine the potential financial loss their company might incur by covering a particular risk.
A risk equivalent can also refer to a health condition or lifestyle that makes a person more vulnerable to serious illness in the future. For example, studies suggest that people with diabetes are more prone to heart disease, while smokers are at higher risk for lung disease. These susceptibilities are considered in an insurance company’s assessment of the risks involved in insuring individuals with these habits or health conditions.
This is why insurance representatives often ask health insurance applicants about their lifestyle, such as whether they smoke. The answers to these questions, combined with the applicant’s current health profile, help determine the premium amount.
