Answer to Question #155697 in Management for Prabhdeep

Question

How insurance provides risk protection to investor ?(please answer in 100 to 150 words)

Answer 1

Entrepreneurship is a form of risk-taking, where an investor stakes out the factors of production, expecting returns on investments as profits. However, it is not always guaranteed that there must be gains from investments. In some instances loses are incurred. Investors are supposed to manage risks, including quantifying, avoiding, minimizing risk, or mitigating its negative effects. When the risks cannot be avoided, the investor has an alternative to insure against the risk. The insurance company undertakes to restore the investor to their initial position, if they are negatively affected by the insured risk (if it occurs). The insurance business principle is that the probability of an insured risk occurring to all the insured investors is minimal. As such, the company pays off the investors affected by the risk, and keeps the remaining premium amounts (profit) from investors who are not affected. For instance, only a small percentage of buildings insured against fire get burned down, yet all the insured pay the premiums while only a few are reimbursed when a fire occurs in any of the buildings.