Risk management insurance is a type of insurance policy purchased by companies and organizations in an effort to limit any potential damages to their activities. These damages can be infrastructure-based or economic, and are generally identified internally or externally by the enterprise.
Steps are taken by firms to assess and mitigate certain risks associated with their continued functions. Companies attempt to lower these risks to near zero, however, any risks that are still present are then insured by another company to allow them to offset these threats. This means that if one of these events that has been identified by the company occurs, a financial recovery will be issued by the insurer.
Organizations identify their assets and determine what is most critical to their continued operations. They then identify threats and assess the likelihood of these events occurring. After leveraging resources to mitigate the possibility of these threats, an exact percentage of likelihood is established. The less likely an event is, the less expensive a risk management insurance policy will be.
An example of risk management insurance could include the location of the business itself. If a company has headquartered itself in an area where earthquakes are prevalent, both the firm and the insurance company will determine the likelihood of the building, company assets, and continued customer base being damaged from an earthquake. It will make assumptions on different levels of damage and determine exact figures on damage estimates. The insurance company will then issue a policy, which the company will pay to ensure its business is financially prepared for this possibility.
Companies that issue these policies generally conduct an independent analysis of the risk factors involved in an organization's business. They leverage a wide range of separate businesses, each with their own threats, whether natural or man-made. Sometimes these threats can come from rival businesses, which are factored into the policy.
By working with a variety of companies over a large range of regions, an insurance company is better able to follow through with payments in the event of damage to a company. The risk management insurance company has the goal of insuring the most amount of businesses with the least amount of payouts. This means that the company will remain financially soluble regardless of what events occur.
This system is important to the continued success of private and public enterprise, both for-profit and non-profit. By mitigating the losses to an enterprise, the business is more likely to survive an unwanted event, keeping the overall economy healthy.
However, this system can also have negative impacts when there is a large economic downturn. For example, if a number of companies insure financial assets such as securities, the economic damage to both the insurer and the companies themselves can be large. If these securities are similar in function and lose value at the same time, the risk management insurance company will loose a large amount of money, possibly go bankrupt and as a result, fail to fulfill its responsibilities. This translates into the collapse of the companies that were insured, creating even more economic damage.