What does “assumed risk” mean in the context of insurance?

The term “assumed risk” in the context of insurance refers to the acceptance of risk by an insurer in return for premiums. When an insurance company underwrites a policy, it takes on the financial risk associated with potential claims for loss or damage that may occur. The premiums paid by the policyholder are essentially compensation for that risk, creating a contractual obligation for the insurer to pay out in the event of a covered loss.

This concept forms the basis of the insurance business model: insurers gather a pool of premiums from multiple policyholders, which enables them to manage the risks more effectively and pay out claims. It highlights the fundamental relationship of risk transfer, where individuals or businesses transfer their financial risks to the insurer, thus, allowing them to mitigate potential economic losses.

In contrast, other options describe different approaches or concepts within risk management and insurance that do not capture the specific definition of “assumed risk.” For instance, the avoidance of risk through legal stipulations is more about preventing risk rather than accepting it, while managing high-risk categories implies a strategy of adjustment or mitigation rather than acceptance. Moreover, denying coverage for high-risk individuals is the opposite of risk acceptance, as it focuses on avoiding the assumption of certain risks instead.