Insurable Risks

While all classes of risks can be reduced substantially through good management, even the best managed companies are still confronted with hazards that they are reluctant or unwilling to assume. Most firms are quite willing to bear normal risks when they can afford to absorb possible losses without endangering their financial structure. On the other hand, they are not willing to assume risks when possible losses involve catastrophic consequences. Attempts are usually made to shift such risks to others if there is an opportunity to do so at reasonable cost. Some kinds of risks may be covered by insurance, which is a social or institutional device whereby the uncertain risks confronting individuals are combined in a group and thus made more certain. Then, the certainty of a relatively small, fixed insurance premium is substituted for the uncertain probability of a large loss.

Among the risks of physical destruction or deterioration, insurance protection is available and commonly carried for protection against fire, windstorm, hail, and damage to merchandise inventories, buildings, and equipment. Losses from theft by outsiders can be covered by insurance, and defalcation of employees may be insured against by having such persons bonded by surety companies. Personal risks involving key individuals are often minimized by insurance policies on their lives. Insurance is even available for certain types of protection against credit losses; it is, however, quite costly and provides only partial coverage, with the result that its use is relatively restricted.