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As we know that one way of hedging the risk is to insure the risk to the insurance company. This method is considered the most important way of dealing with risk. That’s why many people think that risk management is the same as insurance. While the actual circumstances are not like this.
Insurance means an insurance transaction in which two parties are involved, the insured and the insurer. Where the insurer guarantees to the insured that he will be reimbursed for loss that may be suffered by him as a result of an event which will not necessarily happen or which cannot be determined if and when it happened. In the form of the insured being under an obligation to pay some money to the insurer, an amount proportionate to the sum insured, usually referred to as the “premium”.
Viewed from several angles, insurance has several goals and techniques of sharing, among others:
A. From an economic point of view, then:
Target:
Reducing the uncertainty of the results of actions taken by an individual or company to meet needs or achieve goals.
Technique:
By transferring risk to another party and adding a substantial amount of risk to the other party, the magnitude of the potential loss can therefore be estimated more accurately.
B. In terms of law, then:
Target:
Transferring the risks facing an object or business activity to another party.
Technique:
In an indemnity contract (insurance policy) the risk transferred by the insured to the insured, then to the insured, through premium payments.
C. In terms of business, then:
Target:
Share the risks faced by all participants of the insurance program.
Technique:
Transferring risk from individuals/companies to financial institutions engaged in risk management (insurance companies), which will share the risk to all participants of the insurance it handles.
D. From a social point of view, then:
Target:
Bear losses jointly among all participants of the insurance program.
Technique:
All group members (group members) of the insurance program contribute (in the form of premium) to sympathize with the loss suffered by one/some of its members.
E. In mathematical terms, then:
Target:
Predict the magnitude of the probability of risk and the result of the forecast is used to divide the risk among all participants (groups of participants) in the insurance program.
Technique:
Calculates probability based on probability theory (“probability theory”), performed by actuaries as well as underwriters.
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