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In: Accounting

what is the purpose of risk insurance

what is the purpose of risk insurance

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Expert Solution

Insurance is a contract in which an insurer promises to pay the insured party a sum of money if one or more specified events occur in the future, in return for regular small payments - known as premiums. The purpose of insurance is to reduce your business' exposure to the effects of particular risks

The purpose of insurance is to reduce your business' exposure to the effects of particular risks. These could include:

  • damage to, or the loss of, physical assets such as your premises or equipment
  • illness or death of key members of staff
  • compensation claims against the business or its directors by employees or customers
  • business interruption caused by external events such as terrorism
  • volatility and cash flow pressures following an incident

Almost all businesses buy insurance, but the type and amount of cover purchased will vary according to the particular risks your business is exposed to and how much risk you are willing to personally bear.

Insurance is all about managing risk and providing financial compensation in the event of a loss. Generally, the risks people face fall into the following categories:

Personal risk
People are their own greatest asset. Financial loss will almost always accompany the loss of one’s health or life.

Property risk
People will incur a financial loss when owned property is destroyed or damaged.

Liability risk
When people’s action result in injury or damage to others, the law generally provides that they be held financially responsible.


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