Preferred Risk

What Does Preferred Risk Mean?

A preferred risk is a policyholder who is considered significantly less likely to file claims. As a result, insurance companies favor preferred risks over standard or higher risks, as they offer a better chance of generating profit. For the insurer, fewer claims mean more money collected in premiums and less money paid out in claims.

Insuranceopedia Explains Preferred Risk

Insurance companies assess risks based on various factors relevant to their field. For example, in life insurance, being over 70 is considered a high risk, while in flood insurance, a policyholder living in a known flood zone is considered a high risk. As a result, insurers often charge higher premiums to those who represent higher risks to offset the potential for more frequent or costly claims. Conversely, individuals who represent preferred risks may receive better premium pricing due to the lower likelihood of claims.