Question

intuitively explain how the absence of insurance can cause a firm to forgo good investments

Answer 1

Insurance creates the necessary understanding for a firm in terms of internal security and maintenance of operational capital. What this would mean in the case, there is no insurance for the company's asset is that for every loss they incur. They would have to refinance the damage to maintain structure and function for the operations to be run smoothly.

Now, we know that every business decision has a risk to benefit ratio attached to it. We make our decisions based on this understanding. The fact that for new investment, the risk factor might be high, even if there is a high profit, the company would not be able to make a sound decision given that they would need to finance their operation or involve their working capital to fund their endeavors. The opportunities that would provide a lower risk window would not be high on profitability, and therefore, the understanding would be created for the company to not invest in any new projects until they can have a more secure footing.

Even if the company raise the money from the market, the need to be able to safeguard the interests of the stakeholders will make the decision difficult to be undertaken and the most likely resolution would be to not invest in opportunities with low certainty levels, reducing their ability to take risks and be benefitted from the market.