What does "assumed risk" refer to in the context of underwriting?

In the context of underwriting, "assumed risk" refers to the risk that the insurer decides to accept based on the evaluation of an applicant's specific factors, such as their health status, lifestyle choices, occupation, and other relevant information. Underwriters assess these factors to determine the likelihood of a claim being made and the potential cost involved. Once the underwriter assesses that the applicant poses an insurable risk, the insurer will proceed to offer coverage under certain terms, which may include premium pricing that reflects the assessed risk level.

This concept is crucial because it forms the basis of how insurance companies can manage their exposure to financial loss while still providing necessary coverage to policyholders. Factors that lead to higher or lower assumed risks directly influence the premiums charged to customers. Understanding assumed risk helps insurers maintain profitability and grant policies within their risk appetite.