Risk in insurance refers to the chance or possibility of loss, damage, injury, or any unwanted event that may occur in the future and can cause financial harm. Insurance exists because risk exists.
✅ Simple Definition
Risk is the uncertainty about a future event that may cause a financial loss.
Example:
- Your car might get into an accident.
- You might fall sick.
- Your house might catch fire.
- A person may die unexpectedly.
These uncertainties are called risks.
✅ Why Risk Matters in Insurance
Insurance companies assess the risk to decide:
- Whether to give you insurance
- How much premium to charge
- What coverage to offer
- What exclusions to include
Higher risk = Higher premium.
Lower risk = Lower premium.
✅ Types of Risk in Insurance
1. Pure Risk (Insurable Risk)
Only loss is possible, no gain.
Examples:
- Accidents
- Illness
- Fire
- Death
Insurance covers these.
2. Speculative Risk (Not Insurable)
Possibility of loss or gain.
Examples:
- Stock market investing
- Business profits/losses
- Gambling
Insurance does not cover these.
✅ Characteristics of Insurable Risk
A risk can be insured only if it is:
- Unexpected (accidental)
- Measurable (financial value)
- Predictable (in large groups)
- Not intentional
- Causes financial loss
- Common to many people (so risk can be spread)
✅ Example to Understand Risk Easily
You buy car insurance because:
- You don’t know when or if an accident will happen.
- But if it happens, repair costs are high.
This uncertainty + possible financial loss = risk.
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