Risk management, Insurance and importance of insurance
Risk management is an emerging concept in modern business. It is the process that identifies loss exposures faced by the organization and selects the most appropriate techniques for treating such exposures. In the past, risk management was limited which includes property risk, liability risk, and personal risk. Now, risk management has greater scope in modern business.
In the world of finance, risk management is the practice of identifying potential risks in advance, analyzing them and taking precautionary steps. Risk management is the process of analyzing exposure to risk and determining how to handle such exposure. Risk management process is the best practices approach. It focuses on understanding the key risks and managing them within acceptable levels. Risk management is a discipline for identifying risks and determining the ways to address the future goal or minimizing harm and financial losses. A risk manager implements risk management programs to minimize the chances of losses. (The Economic Times)
Risk management is the process of identification and analysis of uncertainty in investment decision-making. Generally, risk management occurs anytime to quantify the losses in an investment. Then, it takes the appropriate action given to their investment objectives and risk tolerance.(INVESTOPEDIA)
Human life and properties are always exposed to risk and uncertainties. It may cause great loss to human beings. Nobody knows earlier when a loss occurs from those risk and uncertainties. Risk cannot be completely eliminated but there is a device to cover the loss of the financial risk, which is known as insurance.
Insurance can be defined as the act of providing indemnity or coverage against harm, as per the contract. Insurance coverage refers to the legal and financial protection against potential future harm. It protects from the risk of person and business. Insurance has become an essential tool to manage the risks of an individual and the corporations. Insurance is an economic institution that allows the transfer of financial risk from an individual to a group by the means of a two-party contract. Insurance is a legal contract that protects people from the financial losses. It is a contract between the insurer and insured in which the insurer promises to pay the financial loss to the insured.
Likewise, Insurance is a legal contract in which an individual receives financial protection against losses from an insurance company. In the modern age, insurance has become an essential tool to manage the risks of an individual and the corporations.
Importance of Insurance
Human beings, his family, and the properties are always exposed to different kinds of risks. Risk involve the losses. Insurance provides a safeguard against uncertainties and risk. It has become the most risk handling method. Insurance contributes a lot to the general economic growth of the society. It provides stability to the functioning of the process. The insurance company develop financial institutions and reduce uncertainties by improving financial resources. The importance of insurance are as follows:
1. Insurance provides security
The Businessman should not worry about the losses or damages in their property if they are duly insured. Life insurance provides security against death and old age sufferings. Insurance provides financial protection to business assets and properties against the risk of theft, fire accidents or any other natural calamities. Financial protection is given when the individual is unable to earn for personal accident and sickness.
2. Insurance reduces business risk or losses
In Business, commerce and industry, huge properties are employed. The property may be turned into ashes due to the slight negligence. A person may not be sure of his life and health. He cannot continue the business up to the longer period to support his dependents. With the help of insurance, he can be sure of his earning because the insurance company will pay a fixed amount at the time of death, damage by fire, theft, accident and other perils.
3. Insurance provides mental peace
An individual can devote himself to achieve efficiency in economic activities due to the peaceful state of mind. Insurance removes the tensions, fears, frustrate and weakening of the human mind associated with the future uncertainty. It provides peace of mind and stimulates more and better work performance.
4. Insurance maintains your family’s standard of living
Insurance has now become an important instrument which provides financial protection against unexpected risk. Insurance is a social device for spreading the chance of financial loss among a large number of people. The insured helps the individual to maintain his standard of living even in old age.
5. Generates financial resources
Insurance generates funds by collecting the premium. The funds are invested in government securities and stock. These funds are gainfully employed in the industrial development of a country for generating more funds. It can be utilized for the economic development of the country. Employment opportunities are increased by big investments that lead to capital formation.
6. Life insurance encourages savings
Insurance develops the habit of saving. It not only protect against risks and uncertainties but also provides an investment channel too. Life insurance enables systematic savings due to the payment of regular premium. Life insurance provides a mode of investment. It develops a habit of saving money by paying a premium. It is a good means to make provision for retirement age. Thus life insurance encourages savings.
7. Promotes economic growth
Insurance plays the significant role in the economy by mobilizing domestic savings. Insurance turn accumulated capital into productive investments. Insurance enables to manage loss, financial stability and promotes trade and commerce activities. Those results into economic growth and development. The insurance plays a crucial role in the sustainable growth of an economy.
8. Medical support
A medical insurance is considered as an essential element in managing risk in health. Anyone can be a victim of critical illness unexpectedly. Rising medical expense is of great concern.
9. Spreading of risk
Insurance facilitates spreading of risk from the insured to the insurer. The basic principle of insurance is to spread risk among a large number of people. A large number of persons get insurance policies and pay the premium to the insurer. Whenever a loss occurs, it is compensated out of funds of the insurer.
10. Source of collecting funds
It collects the small scattered amount from a large number of people and forms large amount of capital. Large funds are collected by the way of premium. These funds are utilized in the industrial development of a country, which accelerates the economic growth. Employment opportunities are increased by such big investments. Thus, insurance has become an important source of capital formation. (Smriti Chand)
INVESTOPEDIA. n.d. Electronic. 2016.http://www.investopedia.com/terms/r/riskmanagement.asp
The Economic Times. n.d. Electronic. 15 06 2016.http://economictimes.indiatimes.com/definition/risk-management
INVESTOPEDIA. n.d. Electronic. 2016.http://www.investopedia.com/terms/i/insurance.asp
Smriti Chand, Insurance. your Article Library.com. n.d. Electronic. 15 06 2016. http://www.yourarticlelibrary.com/insurance/the-role-and-importance-of-insurance-explained/7540/
- Risk management refers to the practice of identifying potential risks in advance, analyzing them and taking precautionary steps to reduce the risk.
- Identifying, evaluating and understanding risks is a very important aspect of business management.
- Insurance is an economic institution that allows the transfer of financial risk from an individual to a pooled group of risks by means of a two-party contract.
- Insurance provides safety and security against the loss on a particular event.
- Insurance removes the tensions, fears, anxiety, frustrate or weaken of the human mind associated with the future uncertainty.
- Insurance is a social device for spreading the chance of financial loss among a large number of people.
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