Insurance as a Risk Management Tool

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Insurance is mainly used to deal with pure risks. For example, some companies produce their products in factory. Under the consideration of security, companies should buy insurance for facilities, plants, and of course workers. Once there is an accident, the company can get compensation to reduce their losses into a lower level. For workers, they can have compensation, too. If they are injured but can’t get anything back. Then no one wants to work for that company anymore, which can lead to a bankrupt of the company. For facilities,

Insurance cannot cover all the risks, as a risk-handling technique, insurance has its advantages and disadvantages.

In the aspect of advantages, insurance is able to protect customers and pay for them when they are been punished or been fined. It reduces the risk of the policyholder. It can give payment or services to insured who suffer loss and give them some necessary help when they need. At the same time, insurance can reduce uncertainty that people may face. Insurance transfer some risks to insurers, then insured’s risk can be diversified. People may feel a sense of safety after they buy insurance. For those people who are too poor to live, social security can help them a lot. They face too many risks, and then government help them to undertake. That’s also the reason why insurance is so important no matter for individuals or for society. As a risk handling technique, insurance is very easy to understand, and also, very easy to buy. A mature insurer have stable insurance system for every kind of insurance. It means that you don’t have to analyze your risks, insurer will help you to plan everything. That’s the reason why it’s been used so widely. Insurance developed in early years. That means it’s quite stable now. The conception of “risk management” is been raised later than insurance.

Compared to advantages, insurance would still have some negative aspects in risk management. The first one might be that when you buy insurance, you don’t know whether the risk you considered will become truth or not. If it does, you control your risk successfully. If it doesn’t, all you get is just a sense of safety. It’s hard to say if you money worthies or not, but actually, insurance is not only a risk handling technique but also a business. At the same time, we should consider that insurance cannot cover all the risks that individuals and companies may face. There are many kinds of risks which is uninsurable. In business risk, it cost a lot and is not so easy for insurance company to specialize every detailed kind of risk. Then the company may work out an average premium that the business should pay. This way will make some low-risk business not willing to buy insurance for their business, which can increase average loss. After that, insurance companies have to make their charge higher. It will reduce the amount of business that wants to buy the insurance. In a word, business risk is too widespread and unpredictable; every small item’s change may cause different gain or loss such as dynamic risk and speculative risk. Business always depends on what people do. For example, if there is someone who wants to gain private profit and then he/she don’t obey rules. It will also increase insurance company’s cost to investigate or increase their compensation. It proceeds to the unbearable insurance fee of expected loss to small firms. All of these are likely to collapse into a vicious circle. Finally, some big insured may benefit, but not for the society.

In a word, Insurance is not a tool to deal with risks but a tool to prevent people from risks.

References

Mark S. Dorfman, David A. Cather (2013). Introduction to Risk Management and Insurance. Pearson Education, Inc., U.S.A., Tenth Edition.

James S.T. and Robert E.H. and David W.S. (2004). Risk Management and Insurance. Cengage Learning, U.S.A., 12th edition.