Risk
Definition
The possibility of loss or the uncertainty of outcome. In insurance, risk refers to the exposure to potential financial loss that is transferred to the insurer.
Example
A manufacturing facility faces the risk of fire, equipment breakdown, product liability claims, and business interruption. These risks can be transferred to insurance companies through various policy types.
In Practice
Risk assessment is fundamental to insurance. Insurers evaluate the probability and severity of potential losses. Higher risks typically result in higher premiums or coverage restrictions. Risk management involves identifying, assessing, and mitigating risks through insurance and other methods. Some risks are uninsurable or require specialty markets.