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.

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 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.

A stand-alone insurance policy or reinsurance treaty can provide coverage for assets that fall under target risk exclusion. 
Using separate policies or treaties allows the insurer or reinsurer to assess the risk to high-value items better, and thus assign a premium designed to cover low frequency, high severity risks.
 

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.

RELATED TERMS
  1. Surplus Share Treaty

    A surplus share treaty is reinsurance in which the ceding insurer ...
  2. Reinsurance

    Reinsurance is the practice of one or more insurers assuming ...
  3. Underlying Retention

    Underlying retention is the net amount of risk or liability arising ...
  4. Net Line

    A net line is the amount of risk that an insurance company retains ...
  5. Special Acceptance

    Special acceptance refers to an agreement made for unusual circumstances ...
  6. Cession

    Cession refers to the portions of obligations in an insurance ...
Related Articles
  1. Insurance

    Facultative vs. Treaty Reinsurance: Differences and Examples

    Reinsurance companies offer insurance to other insurers in case the original insurer does not have enough money to pay claims.
  2. Insurance

    When Things Go Awry, Insurers Get Reinsured

    Guru Warren Buffett is making this sector popular. Learn more here.
  3. Insurance

    World's Top 10 Insurance Companies

    These are the 10 largest insurance companies in the world.
  4. Insurance

    How To Invest In Insurance Companies

    Knowing the special circumstances that insurance companies operate under helps in evaluating whether or not a listed insurance company is a good investment and whether the economic environment ...
  5. Managing Wealth

    6 Insurance Policies That Protect the Wealthy

    Here are six types of insurance that the wealthy use to protect their assets.
  6. Insurance

    12 Insurance Questions for High Net Worth Families

    High net worth families should ask themselves these 12 questions regarding comprehensive insurance.
  7. Insurance

    An Advisor's Guide to Prof. Liability Insurance

    A guide to what financial advisors need to know about professional liability insurance.
  8. Insurance

    Bundle Your Insurance for Big Savings

    Bundling your insurance can save you money and time. Read on to see how to get the most out of multi-line insurance discounts.
  9. Insurance

    How Much Life Insurance Should You Carry?

    Before purchasing life insurance it is important to decide if you really need it, what type of policy is best, and how much coverage you should get.
RELATED FAQS
  1. Can your insurance company cancel your policy without notice?

    Learn about your rights as an insured when it comes to your insurance policy being canceled, including how to access your ... Read Answer >>
  2. How much do changes in interest rates affect the profitability of the insurance sector?

    Learn about the relationship between interest rates and insurance company profitability, and how interest rates can affect ... Read Answer >>
  3. Why is my insurance premium so high/low?

    Insurance premiums can be affected by many factors including: type and amount of risk size of deductible amount of coverage ... Read Answer >>
Trading Center