What Is Risk In Insurance Terms?

Written by Ruth Njiri

Risk is when someone or something you hold of value is exposed to danger, harm or loss. Life is inherently risky and it would be impossible to protect yourself against every potential risk you face.

Risk management is the way that you manage losses you might experience. Sometimes you might change something in your behavior or environment to reduce risk. This can be something as simple as installing a burglar alarm in your home. 

Managing your risk involves a little bit of thought and planning to identify where you might be vulnerable to loss or damage. Most of us engage in simple risk management strategies every day such as; we drive carefully, put our salaries straight into a bank account, lock our house or car when we leave them, and keep our wallets, handbags and mobile phones with us when we go to a cafe or a park.

Other times you will transfer the risk by taking out an insurance policy. Insurance is a form of risk management that protects you against losses in the case of an incident or accident. Insurance transfers the cost of that potential loss from you to the insurance company in exchange for monetary compensation.

In insurance terms, risk is the chance that something harmful or unexpected could happen to you. This might involve the loss, theft, or damage of valuable property and belongings, or it may involve someone being injured.

Insurers assess and price various risks to work out how much they would need to pay out if a policyholder suffered a loss for something covered by the policy. This helps the insurer determine the amount (premium) to charge for insurance.

To be able to put a financial value on a risk, insurers calculate the probability that the insured item or property might be accidentally lost, stolen, damaged or destroyed, how often this might occur and how much it would cost to repair or replace.

Insurers price this risk so that they may determine how much money they need to reserve to pay claims. Before you make the decision to buy insurance, it makes sense to review your own risks and work out how you can reduce the chance of them occurring and if they do occur, how you might reduce the impact on your life.

Therefore, if you are going to work hard, put money aside and invest it in things that are important to you or improve your life, it makes sense to protect those things as best you can with an insurance policy.

Learn more:

What Is Insurance?


About the author

Ruth Njiri