How is risk defined in the context of insurance?

In the context of insurance, risk is fundamentally defined as the possibility of a loss or injury that an insurer agrees to cover under a policy. This definition captures the essence of what insurance is designed to manage: the uncertainty and potential negative outcomes that individuals or businesses face. Insurers assess risk to determine the likelihood of a claim being made and set premiums accordingly.

Understanding risk in this way is crucial, as it helps both insurers and policyholders comprehend the nature of the coverage provided. The insurer's role is to pool these risks across many policyholders to manage and mitigate the potential for significant financial loss. This perspective on risk supports the underwriting process, where the insurer evaluates whether to provide coverage and at what price, based on the anticipated risks associated with insuring a specific individual or entity.

Other options do not accurately describe risk within the insurance context. For instance, the amount of coverage needed pertains more to personal insurance needs rather than the definition of risk itself. The financial amount an insurer can expect to pay annually is more aligned with claims management and financial forecasts, while the total number of policies written relates to the scale of an insurer's operations, not to the concept of risk.