Target Risk (Insurance)

DEFINITION of 'Target Risk (Insurance)'

Classes of assets that are excluded from coverage in either insurance policies or reinsurance treaties. A target risk asset can be covered in a separate insurance policy or reinsurance treaty.

BREAKING DOWN 'Target Risk (Insurance)'

When an insurance company underwrites a policy, it agrees to indemnify the policyholder from losses resulting from specific risks. In exchange for taking on this liability, the insurer receives a premium from the policyholder. Insurers set the premium based on historical loss experience, as well as an estimation of the potential frequency and severity of future losses.

In commercial insurance policies, such as liability insurance or property insurance, insurers are often asked to cover a large number of business assets. For example, a business may want its fleet of vehicles covered. If the types of assets covered is diverse, the insurer will have to determine if each asset carries the same level of risk, and the insurer may want to charge a different rate depending on the overall risk profile. The insurer may determine that some assets that a business wants covered are far riskier than others, and may decide to exclude those assets from coverage. These assets are considered to be a target risk, as the insurer has specifically identified them for exclusion.

Exclusionary language in contracts create a prohibited class of assets that require separate insurance or reinsurance coverage. The types of assets that fall into a target risk class are typically expensive to replace, or are assets that are more likely to create substantial liability claims. For example, a homeowner’s policy may exclude fine art, since the value of the work of art may far exceed the value of other items in the house. A municipality entering into a property reinsurance treaty may find that bridges are excluded because their replacement cost is substantial.

Assets that fall into target risk exclusions can still be covered in separate insurance policies or reinsurance treaties. Using separate policies or treaties allows the insurer or reinsurer to better assess the risk to high value items, and thus assign a premium designed to cover low frequency, high severity risks.

An asset considered a target risk can be covered in a facultative reinsurance treaty, as this type of treaty is designed to cover single risk or a narrow package of risks. This is different than treaty reinsurance, as this type of reinsurance has the reinsurer automatically accept all ceded risks in a specific class.