Updated: 09 June 2023

What Does Risk Mean?

Risk is the probability that a particular loss will occur. Risk is very relevant for insurance companies because it can determine whether or not they will have to spend money satisfying a claim. Risk is also relevant for policyholders because if they represent a higher risk, then that can mean they may need to pay higher premiums.

Insuranceopedia Explains Risk

Risk can drastically affect premiums. For example, a young, healthy person who buys life insurance is deemed a much lower risk than an elderly, sick person. This is because the chances of the young, healthy person dying are much lower. On the other hand, the elderly, sick person could be viewed as having a very high chance of death, and thus having a much greater risk that the insurance company will have to pay out a claim. Often, if a person’s risk is viewed as too high, then they may even be rejected for insurance coverage.

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