In insurance, what is meant by 'risk'?

In the context of insurance, 'risk' refers to the interactions of various outcomes that can lead to uncertain results. This encompasses a range of potential events or scenarios that may lead to a loss or damage, underscoring the inherent uncertainty involved in insurable events. Risk is fundamentally about understanding probabilities and variations associated with those outcomes, which is crucial for insurance underwriting and pricing.

The concept goes beyond merely financial losses or limited outcomes. It involves assessing the likelihood of various incidents occurring and their potential impacts, including but not limited to physical damage, liabilities, or health-related incidents. This broader understanding of risk is essential for insurance companies to develop effective policies that address the diverse needs of their clients.

In contrast, guaranteed events do not embody risk because they do not involve uncertainty. Only focusing on financial losses ignores other types of risks that can affect individuals and organizations. Defining risk as a pre-defined set of circumstances simplifies a complex phenomenon that is better understood as a spectrum of possible interactions and outcomes. Therefore, recognizing risk as interactions of various outcomes captures the essence of how uncertainty plays a critical role in insurance.