Risk and Insurance
Business Organization and Management, 2012
53 Pages Posted: 18 Jul 2019
Date Written: 2012
One of the essential features of business is risk. Future being uncertain, all business activities involve risk of one type or the other. Aban Off shore faced the risk of losing its gas exploration rig in the ocean, Ranbaxy faced the problem of litigation with other US pharmaceutical companies and a ban from the US government for the production facilities not conforming to the US standards, Wockhardt faced the problem of incurring huge loss in foreign exchange trading and Union Carbide lost its business aft er the Bhopal gas tragedy. Lehman Brothers, a leading investment banker of the United States, lost heavily in the sub-prime crisis. No company is immune to the risks involved in its business. There are some risks that can be anticipated and others cannot be. Some risks can be avoided and others cannot be. There is a need to manage the risk. Several methods have been developed over time. By following these methods and procedures, some risks can be avoided, some can be minimized and others can be shift ed or transferred to other insurance companies. Insurance as a business is an important institution helping individuals and businesses to share risk and thereby have a smooth functioning of business. In 2007, 335 natural disasters caused economic losses of $64 billion, out of which $40 billion was uninsured. The larger a disaster, the more the players needed to share the risk: individuals, corporations, governments, insurance, reinsurance and capital markets. It has been found that the share of developing countries in total insurance coverage is very small; of the insured losses, 80–90 per cent are from Europe and America, while Asia’s share is just 5 per cent. In the future, climate change is likely to cause more destructive and expensive disasters; as a result, insurance is becoming expensive with the rise in premium rates. This chapter focuses on business risks, their management and the insurance business.
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