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Target Risk

Reviewed by Vineeth | Updated on Sep 30, 2020

Catalogue

Introduction

Target risk assets are a class of assets that are not covered under the coverage of a reinsurance treaty or insurance policy because of a particular risk they possess. A different reinsurance treaty or insurance policy is needed to include the target risk asset.

Breaking Down Target Risk

When an insurer is underwriting an insurance policy, it accepts to indemnify the insured from damages and losses that arise due to particular risks and threats. The insured will pay a premium for the risk that he is going to assume in exchange for the assurance of the insurer covering the same.

The insurance company will determine the price of the premium depending on the experience of prior losses and estimation of the probable severity and frequency of the losses that may happen in future.

The insurance company can arrive at a conclusion that particular assets are at a greater risk than others and can leave them out from the coverage of insurance policies. These assets are termed the target risk because the insurer will particularly have determined these for the exclusion.

Examples

The exclusionary language in the field of insurance will create a forbidden category of assets that need different reinsurance or insurance cover. The kind of assets falling under the target risk category are generally costly to be substituted or assets that are highly prone to creating considerably high claims of liability.

For instance, a house owner insurance policy can leave out interior designs as the value of the items used are relatively very high and are more likely to get hampered. The overall cost of these items may exceed the price of other items in the house put together. A municipal corporation beginning with a property reinsurance treaty may go on to see that the flyovers and bridges are excluded as the cost to replace the same is very high.

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