An informed decision not to become involved with, or continue with, a risk situation. The potential loss is regarded as greater than the potential value of the risk-creating activity, e.g. using PCBs in manufacturing processes, building on flood plains.
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Any measure which reduces to zero the probability of a loss from a given exposure may be property classified as risk avoidance. Risk avoidance may be achieved by either abandoning or never undertaking an asset or activity which involves the loss exposure being avoided. (By some authorities, risk avoidance is also called ‘risk elimination’ because risk avoidance eliminates entirely a given exposure to loss.)
Insurance Encyclopedia
Risk Based Capital
REINSURANCE: The amount of capital needed to absorb the various risks of operating an insurance business. For example, a higher risk business requires more capital than one with lower risks. The calculation is intended to be unique to each insurer.
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The assessment of the capital requirement for a general insurer by considering the risk profile of the business written and its operations. The required minimum margins of solvency are determined after considering IRDA requirements in India.
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The determination of a member’s capital requirement according to the spread of syndicates in which he participates and the nature of business that those syndicates underwrite.
Risk Based Capital (RBC)
A method utilized by insurance regulatory authorities to determine the minimum amount of capital required of an insurer to support its operations and write coverage. The insurer’s risk profile (i.e., the amount and classes of business it writes) is used to determine its risk based capital requirement.
Risk benefits
Pensions term describing benefits that are not pre-funded and that are often insured on an annual basis, which usually means death or disability benefits.
Risk bundling
Risk financing approach that allows a company to benefit from its own diversification across the different classes of risk, and over time through the use of captives or multiline, multi-year programmes.
Risk charge
An amount identified in some reinsurance agreements as specifically to be retained by the reinsurer for assuming the risk under the policies reinsured a share of the profits in excess of the risk charge is returned to the cedant as an experience refund.
Risk class
Group of insured individuals who have a similar risk to the insurance company. Common risk classes are standard, preferred, nonsmoker, substandard, and uninsurable.
Risk Classification
The process by which a company decides how its premium rates for life insurance should differ according to the risk characteristics of individuals insured (e.g., age, occupation, sex, state of health) and then applies the resulting rules to individual applications. (See: Underwriting)
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UK: Underwriters combine individual risks into groups or ‘classes. This facilitates the underwriting process and enables individual proposals to be considered in the light of the class to which they belong. Some classes, e.g. total abstainers, mature applicants, may receive preferential treatment while others may belong to an excluded class, e.g. a motor insurer might exclude jockeys or others with a high exposure.
Risk combination
Homogeneous groups of risks among whom the losses of the few can be distributed. There is no substantial advantage in two people combining to share each other’s losses, reciprocity excepted. It is only by large homogeneous groups combining through insurance that makes it possible to apply the law of large numbers. Risk combination is at the heart of insurance. The loss lighteth rather easily upon many than heavily upon few’ (Elizabethan Act 1601).
Risk contract
1. Provider’s agreement with a managed care plan to deliver medical services to members for a determined, fixed payment without knowing the cost of the services. The provider is responsible for managing the medical care and risks losing money if total expenses are more than the predetermined amount of funds. 2. In a Medicare risk contract, the federal government sends monthly fixed payments to the managed care plan for services given to Medicare beneficiaries who join the plan and agree to receive all medical care through the plan. The plan is at risk for services regardless of the extent, expense, or intensity of services rendered. Sometimes an additional fee may be paid by each enrollee. Medicaid beneficiaries enrolled in risk contracts are not required to pay monthly premiums.