What does the term 'risk' refer to in insurance?

The term 'risk' in insurance is primarily defined as the likelihood or probability of a loss occurring. This means it encompasses the chance that something adverse may happen, which could lead to a financial loss for the policyholder or insurer. Understanding risk is crucial for insurers, as it helps them assess how likely it is that a claim will be made and informs their decision on how to underwrite a policy, set premiums, and apply necessary exclusions.

In contrast, other options focus on related concepts that are integral to understanding the broader insurance framework but do not encapsulate the primary definition of risk. The severity of a loss addresses the potential impact or financial consequence should the risk materialize, while the contract for coverage pertains to the actual policy held by the insured. The value of insured property refers to the worth of the item being protected, which directly influences the amount of coverage needed or the premiums charged. Each of these aspects is crucial in the insurance context, but they do not specifically define 'risk.'