Insurance and Hedging Processes Essay Example | Topics and Well Written Essays - 2250 words

Insurance and Hedging Processes - Essay representativeThe role of insurance policy concern in regards to lay on the line transfer is influentially great, and this is in regards to pretend management in particular risk management is basically considered as being defined as the executive director decisions that surround the management of slender risks, and As such, risk management is a much broader concept than insurance management because insurance is only one of several methods for dealing with risk. Risk management attempts to identify the pure risks faced by the firm or organization, and uses a wide variety of methods, including insurance, for handling these risks (Goto, 1997). Insurance in incredibly important and in fact critical in regards to this particular situation, and it is a basically statistics-based character reference of pooling instrument which is used for risk management based on the law of that of especially large rime furthermore, it has a certain essence w hich, if used appropriately, seems to be rather similar to that of an option contract. Then in that location is hedging, which, in finance, is an investment that is espousen out specifically to reduce or cancel out the risk in another investment. Hedging is a strategy designed to minimize exposure to an unwanted business sector risk, while still allowing the business to profit from an investment activity (Wikipedia, 2007). Hedging basically allows for the control of risk, as although risk is basically inherent to any type or form of business activity, much of this risk is unwanted and it cannot be avoided without hedging. Someone who has a shop, for example, can take care of natural risks such as the risk of competition, of poor or unpopular products, and so on. The risk of the shopkeepers inventory being destroyed by fire... Hedging basically allows for the control of risk, as although risk is basically inherent to any type or form of business activity, much of this risk is unwa nted and it cannot be avoided without hedging. Someone who has a shop, for example, can take care of natural risks such as the risk of competition, of poor or unpopular products, and so on. The risk of the shopkeepers inventory being destroyed by fire is unwanted, however, and can be hedged via a fire insurance contract (Wikipedia, 2007). From this example we can quite clearly see the balance between wanted risk or risk that can be handled, and unwanted risk, and thus the immenseness for a process such as hedging. Catastrophic risks are very important to take into context here, and these types of losses in particular are considered as being in the upper layer, in that they emit rarely for the most part and yet they are the most devastating, and the severity overall is of such a scale that the viability of the entire enterprise is actually threatened. The reason why catastrophic risks are considered to be unavoidable insurable risks lies in their nature, which tends to make the pooling technique break down and become unworkable. Catastrophic risks, such as hurricanes or earthquakes, are classified as unknown risks and are characterized by a fundamentally non-linear phenomenon in which chaotic patters emerge easily, and it is also very easy to predict the probability of the expected loss (Goto, 1997).