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

Insurance and hedgerow Processes - Essay ExampleThe role of insurance management in regards to endangerment exchange is influentially great, and this is in regards to risk management in particular risk management is basically considered as organism defined as the executive decisions that adjoin the management of pure risks, and As such, risk management is a much broader concept than insurance management because insurance is only one of several methods for dealings 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 fantastically important and in fact critical in regards to this particular situation, and it is a basically statistics-based type of pooling instrument which is used for risk management based on the law of that of especially large numbers furthermore, it has a certain essence which, if used appropriately, seems to b e rather similar to that of an option contract. Then there is hedging, which, in finance, is an investment that is snapn out specifically to reduce or piece of asscel out the risk in another investment. Hedging is a strategy knowing to minimize exposure to an unwanted business 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 market keepers 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 unwanted and it cannot be avoided without hedging. S omeone 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 difference between wanted risk or risk that can be handled, and unwanted risk, and thus the importance for a process such as hedging. Catastrophic risks are very important to take into consideration here, and these types of losses in particular are considered as being in the upper layer, in that they occur rarely for the most part and yet they are the most devastating, and the severity overall is of such a descale 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 start 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 disorganized patters emerge easily, and it is also very easy to predict the probability of the expected loss (Goto, 1997).