What does a 'material change in risk' refer to in insurance terms?

A 'material change in risk' refers to a significant event or alteration in circumstances that affects the risk associated with insuring a policyholder, which in turn influences how premiums are calculated. Such changes could include factors like a policyholder moving to a different area with higher accident rates, acquiring a new vehicle, or changes in the policyholder's personal circumstances such as health or lifestyle that could increase the likelihood of a claim.

When an event significantly alters the risk profile of the insured party, it prompts the insurer to reassess the premiums. This reassessment ensures that both parties, the insurer and the insured, are adequately protected and fairly charged based on the updated risk assessments. Understanding this concept is crucial because insurers rely on accurate risk assessments to set appropriate premiums, helping maintain the financial stability of the insurance system.