In insurance terminology, how is risk defined?

• A. The chance of loss
• B. Potential exposure to loss
• C. Both A and B
• D. Cost of coverage

Answer: (C)

In insurance terminology, risk is defined as the potential for loss or harm and encompasses both the chance of loss and the potential exposure to that loss. Understanding risk involves recognizing that it not only pertains to the likelihood of an adverse event occurring (the chance of loss) but also includes the broader context of what factors might contribute to that loss (potential exposure to loss).

This comprehensive definition is crucial in the insurance industry because it helps insurers assess and price policies adequately. By acknowledging both aspects, insurers can evaluate the risk more effectively, leading to appropriate premiums and coverage terms that reflect the true level of risk involved. This approach ensures that all possible dimensions of risk are considered, making it a fundamental concept in underwriting and policy formulation.

The cost of coverage, while related, does not fully capture the essence of risk as defined in the insurance context; thus, it is not part of the definition of risk itself.