What does risk refer to in the context of insurance?

In the context of insurance, risk specifically refers to the chance of loss. This concept is fundamental to how insurance operates, as it involves evaluating the likelihood that a policyholder will experience a negative event that leads to a financial loss. Insurance companies assess risk when determining premiums and coverage options, aiming to balance the potential for paying claims with the need to remain profitable.

The focus on loss is crucial because insurance is essentially a financial safety net; it provides compensation in the event that something undesirable occurs, such as property damage, illness, or liability. This definition highlights why understanding risk is vital for both insurers and those seeking coverage, as it shapes the entire insurance framework and ensures that resources are allocated effectively to mitigate potential financial impacts.