Insurance as a Risk Management Tool: A Business Perspective

This report examines the role of insurance as a risk management tool in a business context. It begins with a historical overview of insurance, tracing its evolution from ancient times to its present-day significance. The report then explores the modern applications of insurance, including its function as a risk transfer mechanism and its impact on various aspects of the business environment. It discusses government involvement in the insurance sector and delves into the concept of pure risk, highlighting the limitations of insurance coverage in speculative scenarios. The report emphasizes the importance of understanding the core factors of insurance, such as the insurability of risks and the necessity of insurable interest, to effectively utilize insurance for safeguarding business interests. Finally, it touches upon the concept of captives and other insurance mechanisms. The report draws on the work of several authors and provides valuable insights into the complexities of risk management through insurance.

Running head: RISK MANAGEMENT
Risk Management
Name of the Student:
Name of the University:
Author Note:

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Insurance is a good first choice, and a good last choice, but hardly ever the best choice
for an organisations risk financing programs:
Early history:
The concept of insurance is quite old and popular in human society. In ancient times
the Babylonians and Phoenician had their ocean or marine insurance to secure their trade in
cases the ship did not reach its intended destination with all the goods or if there was any loss
of payment. Even in Rome varied associations had their own form of insurance coverage for
their specific members and during any of their family member being ill, injured or in funeral
ceremony of their dear ones the insurance gave them full coverage. Even during 17th century,
in England the concept of insurance who underwrite all types of insurances well built with a
form of syndicate formed by varied working professionals (Pearson, 2015).
Present day scenario:
Today with the changing nature of global business environment, the changing lifestyle
patterns, income patterns of individuals the concept of insurance has largely evolved. Today
the insurance schemes are mainly targeted to secure one from either financial risk, or act as a
risk transfer machine, act as an assistance to the community by supporting public industry,
boost commerce as well as assist government in its taxation and liaisons. The significance of
insurance is so widespread that even the Government of varied nations have taken serious
interest in mandating the provision of insurance through varied Acts and regulations like Life
Assurance Companies Act, or the Employers Liability Insurance Companies Act 1907 for
business security, personal wellbeing and for the larger good of the society (Rawlings, 2017).
Risk management in Business environment and role of Insurance:
The insurance market place does have multiple ways in transferring risk which is basically
concerned with commercial insurance and basically includes captives, risk retention groups,

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large deductible plans, catastrophe bonds, weather-based derivatives, sidecars and
collateralized reinsurance (AcemogluOzdaglar and Tahbaz-Salehi, 2015). All theses
insurance mechanisms almost account to more than 25-35% of the U.S. commercial market.
However though from the above presented discussion it might seem that insurance is no
doubt a necessary choice or good choice for organisations to safeguard itself yet it can never
be the best choice. According to global business market experts the basic purpose of
insurance is to prove strong protection against loss, it is neither speculation nor gambling
hence there are certain core factors which must be ascertained by the business houses to
understand the basic of how the insurance can be best utilised. For instance insurance
companies are only concerned with pure risks as any speculative risk such as any business
decision where their might is some possibility of gain and some possibility of loss, such
situations cannot be insured by any insurance company. This is particularly important for the
business organisations as they often engaged in such speculations in order to make
unexpected returns of profit but at the cost of huge financial or organisational risks. Such
instances are of course out of the realms of insurance. There have been instances where
insurers have been extremely criticised for limiting their coverage as the losses increased, the
main reason behind such activity is increasing amount merges in the business world where
large financial risks are involved hence insurance companies specifically in the U.K business
market have decreased their coverage in the recent years (Mao, Carson and Ostaszewski,
2016).
Hence for business organisations to help make their risk come under the coverage of
insurance, the loss must not be in control of the insured which means that business loss due to
fire or any natural calamity can be insured but not loss due to gambling which could have
been prevented earlier, the loss must be specifically measurable as insurance company
reimburse losses with money and most importantly to make insurance ones best choice

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individuals or business organizations must possess an insurable interest or else no insurance
company can safeguard one’s loss.

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References:
Acemoglu, D., Ozdaglar, A. and Tahbaz-Salehi, A., 2015. Systemic risk and stability in
financial networks. American Economic Review, 105(2), pp.564-608.
Mao, H., Carson, J.M. and Ostaszewski, K., 2016. Is Risk Taking or Moral Hazard Beneficial
to the Insured and the Society?. Available at SSRN 1887425.
Pearson, R., 2015. Introduction: Towards an international history of insurance. In The
development of international insurance (pp. 19-42). Routledge.
Rawlings, P., 2017. What can history tell us about insurance regulation?. In Systemic Risk
and the Future of Insurance Regulation (pp. 31-46). Informa Law from Routledge.