Insurance

Risk

Insurance risk is the possibility of an event that creates a financial loss. Insurance is most useful for risks that would be difficult to absorb yourself.

4 min

Insurance 101 • 02

Insurance starts with a risk, not a product.

The first question is what financial problem would happen if something went wrong.

Risk has both probability and consequence.

An event can be unlikely but still worth planning for if the financial damage would be severe.

Financial risks can include

01A major home loss02A death that removes household income03An illness that prevents work04Liability for damage or injury05Large unexpected repair costs

Small and large risks can be handled differently.

Manageable loss

You may be able to absorb the cost from savings or cash flow.

Severe loss

Insurance may be useful because the cost would overwhelm your finances.

The size of the possible loss changes the decision.

Loss A$200

Loss B$200,000

ProbabilityOnly part of the question

Financial impactAlso matters

Insurance itself has a cost.

Paying premiums for every possible small loss can be inefficient, which is one reason policies use deductibles and limits.

Think about risk using

01How likely is the event?02How large could the loss be?03Could I absorb it myself?04Would the loss affect other people financially?

Remember this

Insure the risks that would be hard to carry alone.

Start with the financial consequence, then decide whether transferring that risk makes sense.

Lesson complete

Reviewed 2026-08-18

Sources

Financial Consumer Agency of CanadaHow insurance works ↗

1 / 1