Insurance Risk Defined

Insurance Risk Defined

Insurance risk, like any other kind of risk, is the chance that something bad may happen. In order to be a valid insurance risk, however, that bad thing that may happen must have the potential of bringing with it a negative financial impact. Listening to the day’s weather forecast for rain and going out for a long walk without a hat, umbrella or raincoat involves risk, at least of getting soaked, but doesn’t include the potential of financial loss as a result. So, that particular risk cannot be considered an insurable risk, due to the absence of potential financial loss.

Risk assessment, another term for underwriting, is what’s used to assess or evaluate the insurance risk associated with a particular insurance policy. It’s also used in determining the pricing of a policy, helping to ensure that a correct policy premium is charged.

Generally, insurance risk involves the damage, theft or loss of property or personal belongings. It may also involve personal injury or death. As an insurance company underwriter, your job is to assess various risks to determine whether a particular risk is worthy of being shared by your company and, if so, how much to price the policy being written.

Assessing Insurance Risk

An insurance contract is a risk-sharing proposition between an insurer and an insured. As the insurer, you want to make sure any insurance risk you take on has the potential of earning money for your company rather than being the source of a financial loss. An important part of the underwriting process is being able to accurately assess each insurance risk with which you’re presented to determine the chances of a covered loss occurring. There are multiple factors that play into this determination and insurance risk is the underlying factor in all underwriting. If your research to determine the degree of risk finds that it’s too high, you may simply decline from offering coverage. As an alternative, you may point out insurance risk mitigation steps that could be undertaken in order to lessen the degree of insurance risk to make coverage possible. This occurs with the help of risk identification conducted by the proposed insured as well as insurance inspection reports provided to you, the underwriter.

The Significance of Insurance Risk Classes

A major factor affecting the underwriting process of an insurance policy is determining into which insurance risk class the proposed insured falls. This enables you to utilize statistics dealing with the average degree of risk a particular individual presents based on the average degree of risk exhibited by others belonging to the same group of those having similar characteristics.

Knowing the applicable insurance risk class also makes it easier to come up with proper policy pricing. Because each of the individuals in the risk class group share similar characteristics, it makes it easier to know the chances of any particular policyholder suffering a covered loss and filing a claim. Those falling into a higher insurance risk class can expect to pay higher premiums than those in a lower (less risky) group.

Pricing a policy is basically pricing an insurance risk or risks. The amount of premium charged for a policy is partly determined by the estimated amount needed to pay out to an insured if they suffer a loss covered by the policy. Establishing a financial value for a particular insurance risk or risks, you can then calculate the probability that a covered item will be damaged, lost, stolen or destroyed, how often this might occur and the cost of repair or replacement. This will advise you of the amount of money your company will need to have in reserve for the purpose of paying claims.

Insurance Risk Management

The idea of risk management stems from the realization that designing a business and training employees to minimize potential losses rather than just buying insurance to cover them could significantly reduce the amount of losses suffered. The same holds true for advising homeowners about potential risks and/or liabilities that may exist regarding their homes. This is an important reason for home insurance inspections to be conducted in conjunction with the underwriting of a new homeowner’s insurance policy. A well-conducted home inspection benefits both the insured and the insurer and can save money for both by uncovering risks that can be mitigated or managed before a loss is able to occur.

Risk Mitigation

As a homeowner, it’s important to safeguard your home and anyone coming into it or onto your property against any risks that may exist there. As a property insurance company underwriter, it’s important that the policyholders you cover do the same, and whatever you can do to help them achieve less risk in their homes will benefit both them and your company.

There are numerous benefits homeowners can gain by managing the risks in their homes, including:

  • Safeguarding their valuables, including their entire home, which may be their most valuable asset
  • Safeguarding visitors who come onto their property or into their home
  • Protecting the environment
  • Being prepared for the variety of circumstances that may occur in conjunction with natural disasters
  • Reducing potential liabilities
  • Helping to determine their specific insurance coverage needs


The litigious society in which we currently live makes people who have been harmed much more likely to sue. Since liability is covered in nearly all homeowner’s insurance policies, it’s important that your policyholders understand the risk liability poses. Most homeowner’s insurance policies limit their amount of liability coverage, often to $100,000, even if a judgement for a lifelong debilitating injury is in the millions. Homeowner’s should understand that any costs above and beyond the amount your company provides for liability coverage must be borne out by them personally. It may be wise for them to add a high-value umbrella policy to their homeowner’s protection. Here are a few facts they should keep in mind regarding liability suits:

  • Any steps taken to reduce or prevent the potential for injuries in their home could help in their defense in a liability lawsuit
  • Courts are likely to be sympathetic to the claimant in a liability lawsuit and give them the benefit of the doubt
  • In court, homeowners are typically held to a high standard of responsibility for the safety of their homes. Families with swimming pools, trampolines or treehouses need to be especially vigilant in keeping their property safe from potential injuries of visiting children, even if those children are uninvited
  • These days, people are most aware of the resources available to them if they are harmed or injured due to someone else’s liability

Further Homeowner’s Insurance Risk Mitigation

Taking a good look around their home and their property is the first step a homeowner should take to understand what potential liabilities exist that, if realized, could create the need to submit an insurance claim. Slip, trip and fall risks, which are not uncommon, can be mitigated by attending to uneven surfaces on sidewalks and driveways and securing damaged or loose steps on porches. A thorough home inspection, pre-policy approval, can go a long way to motivating homeowner risk mitigation. At Insurance Risk Services, our job is to help you with your job by uncovering potential insurance risks. Learn more here.