- Defining Risk: In insurance, risk refers to the potential of financial loss or damage. Insurers deal with uncertainties that are out of the policyholder’s control (e.g., accidents, natural disasters).
- Risk Pooling: By pooling the premiums of many policyholders, insurers can cover the risk of loss for a few.
- Moral Hazard: This refers to the tendency for insured individuals to take on more risk because they know the insurer will cover some of the costs.
The Concept of Risk in Insurance