What is Target Risk (Insurance)?
Target risk assets are classes of assets excluded from coverage under either insurance policies or reinsurance treaties due to the specific risk they pose. A separate insurance policy or reinsurance treaty may cover a target risk asset.
Understanding 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 assuming this liability, the insurer receives a premium from the policyholder. Insurers base this premium price on historical loss experience, as well as an estimation of the potential frequency and severity of future losses. The insurer may decide that some assets are far riskier than others and may exclude those items from coverage. These assets are target risks, as the insurer has specifically identified them for exclusion.
Exclusionary language in insurance contracts creates 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 price of other items in the house. A municipality entering a property reinsurance treaty may find the exclusion of bridges because their replacement cost is substantial.
Target Risk in Commercial Settings
In commercial insurance policies, such as liability 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 protected. If the types of assets included are diverse, the insurer will determine if each asset carries the same level of a risk profile.
An asset considered a target risk can be covered in a facultative reinsurance treaty, as this type of treaty is designed to cover a single risk or a narrow package of risks. Facultative reinsurance is different than treaty reinsurance, as this type of reinsurance has the reinsurer automatically accept all ceded risks in a specific class.