What does the term 'risk' refer to in insurance?

In insurance, the term 'risk' specifically refers to the chance or uncertainty of loss occurring. It encompasses the potential for an adverse event that can result in a financial burden for the insured party. Understanding risk is fundamental to the operations of insurance because it drives the assessment of premiums, policy terms, and the overall structure of coverage.

For insurers, evaluating risk involves analyzing various factors that contribute to the likelihood of a loss, which can include statistics, health factors, environment, and behavior. The nature of risk influences how insurance products are designed and priced, as premiums must be calculated to cover the expected losses associated with those risks. Therefore, defining risk accurately is crucial for both the insurer and the insured in establishing a mutually beneficial insurance arrangement.