How is "risk" defined in the context of insurance?

In the context of insurance, "risk" is defined as the possibility of a loss or adverse outcome. This definition captures the essence of what insurance aims to manage and mitigate. Insurance is fundamentally a financial arrangement designed to provide protection against uncertainties that can lead to financial losses. By understanding risk as the potential for adverse events, insurers can assess, price, and underwrite policies according to the likelihood and severity of those risks.

The other choices reflect different aspects of the insurance business but do not define risk itself. The total number of claims submitted may indicate the level of risk within a particular portfolio but does not constitute the definition of risk. The rate at which policies are sold pertains to market activity rather than the concept of risk. Similarly, the amount paid by policyholders per year relates to the financial contributions of policyholders and does not concern the definition of risk in the insurance field. By recognizing risk as the possibility of loss, insurers can create mechanisms to pool risk and provide the necessary coverage for policyholders.