Preferred Risk

Definition - What does Preferred Risk mean?

A preferred risk is a policyholder who is considered significantly less likely to file claims. Therefore, insurance companies prefer it over a standard or higher risk because the former represent a better chance to make more profit. For the insurer, fewer claims equates to more money taken in and less money paid out.

Insuranceopedia explains Preferred Risk

Insurance companies rate risks on different terms as applicable to their field. For example, for life insurance, being older than 70 is a high risk. For flood insurance, a policyholder living in a known flood zone is a high risk. Therefore, companies oftentimes charge those who represent higher risks a higher premium to offset the potential of more claims or more costly ones being paid out. However, those who represent preferred risks would be able to get better premium pricing due to the lower risk they represent.

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