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Unit 2: Risk and Insurance

2.7 Summary Notes

All pure risks are insurable but speculative risks, on the whole, are not.
Insurance is concerned only with situations where monetary compensation is given
following a loss. Loss or damage of property may lead to a loss, which is quantifiable.

The risk that is to be insured must result in some form of financial loss to the person taking
insurance.
Liability risks arise out of human mistakes often termed as civil wrongs committed by a
person resulting in injury and/or death to another person, and/or loss of or damage to
property.
Firms run risks of legal, social, political, and economic environment in which they operate.
Changing social norms can interrupt a firm’s operations in many ways; for example, bad
and complacent attitudes to work, pilferage, and wage differentials.
Today, industrial firms run the risk of heavy fines if they violate pollution laws, even
accidentally.

Insurance allows you to transfer the financial risk of certain types of losses to another
entity, usually an insurance company that is organized according to stringent federal and
state regulations specifically for the purpose of protecting you against losses.

Insurance helps to maintain correct distribution of cost. Every business man tries to pass
on to the consumer all types of costs including accidental and losses also.
A life insurance policy increases the credit worthiness of the assured person because it can
provide funds for repayment if he dies.

Insurance companies spend large sums of money with a view to finding out the reasons of
fire accidents, theft and robbery and suggest some measures to prevent them.
People hesitate to invest their capital where financial losses are great. If protection is
provided against these risks by means of insurance, several investors will become ready
to invest their funds in those fields.
Risk Management evaluates which risks identified in the risk assessment process require
management. It then selects and implements the plans or actions that are required to
ensure that those risks are controlled.

2.8 Keywords

Business liability insurance: Business liability insurance covers accidents that occur on the
business premises, product defects and mishaps that occur during normal business operations
on and off premises.
Fidelity Risks: Risks arising due to dishonesty of employees and others in course of performance
of their duties causing loss of money and stocks to the owner.

High-gearing: A heavy dependence upon loan capital relative to equity capital is known as a
high capital gearing which increases the risks for creditors and shareholders both.
Insurable Risk: A risk which can be insured by an insurer. The conditions that make a risk
insurable may be probability of occurrence of loss, loss not in control of insured, capability of
loss to be calculable, etc.
Liability Risks: They arise out of human mistakes often termed as civil wrongs committed by a
person resulting in injury and/or death to another person, and/or loss of or damage to property.
Production Risks: A firm may fail to produce its decided output at the desired and planned unit
cost due to uncertain event is known as the production risk.

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