Understanding risk: a beginner’s guide

What does risk mean for insurers, and why is it so important to understand how it works? Here’s our quick guide.

Here is a quick guide.

You buy insurance to transfer the risk of losing out financially if specific events happen, away from yourself and onto the insurer. 

Those events could be anything from your home being damaged or destroyed, or your car being involved in an accident, to you falling ill while you are travelling abroad. 

In return for taking on the risk of any potential financial losses, the insurance company asks you, the insured person, to pay a regular charge – the premium. The insurance policy represents the contract between you.

How do insurers calculate risk?

They will look at whether you represent a relatively higher or lower risk of making a claim than the average customer. 

Their assessment of this will then impact directly on the premium – the price – that you end up paying. The more likely you are to claim, the more you pay. In extreme cases, if the insurers consider the risk of having to pay out to be too high, then you may not be able to get the cover you need at all. 

The logic behind this is simple. If the risk that you will suffer a financial loss and will need to claim is high, then that represents a bigger risk that the insurer will have to pay out – and so they will increase the premium accordingly to mitigate this. 

What does this mean for me when I look for insurance?

Finding the right insurance is about striking a careful balance between your needs and those of the insurer. Insurers want to cover the risk of having to pay out if a specified event happens. In turn, you want to make sure that you’re covered if the worst happens and, crucially, that you can afford the regular payments. 

Everyone has their own personal circumstances and requirements. Because of this, it makes sense to avoid getting generic insurance cover – the kind you might find on a comparison website.

At L Wood we’re experts in finding a balance, with the specific insurance product that will keep everyone happy. 

Call us today on 01274 515 747 or email us at mail@lwood.co.uk to find out how we can help.