What does 'risk management' involve in insurance?

Risk management in insurance is fundamentally about the process of identifying, assessing, and mitigating risks to minimize financial loss. This involves a systematic approach where potential risks are recognized, evaluated in terms of their likelihood and potential impact, and strategies are developed to address them. These strategies can include transferring the risk (e.g., through insurance), avoiding the risk, reducing the likelihood of the risk occurring, or accepting the risk if it's manageable.

This method is crucial for insurance providers, as effectively managing risk allows them to maintain financial stability and offer coverage that clients can rely on. It helps in determining how much coverage is needed, the types of coverage best suited to a client's needs, and setting appropriate policy limits based on the assessment of risks. Thus, engaging in comprehensive risk management ultimately helps insurance companies protect themselves and their policyholders from significant financial losses.

Options involving the determination of policy limits, controlling administrative costs, or selling multiple products refer to specific aspects of insurance operations but do not encompass the broader, more strategic focus of risk management.