Explain how insurance is a prime risk management tool.

Insurance as a Prime Risk Management Tool

In general, risk management deals with risks by designing the procedures and implementing the methods that lessens the loss occurrence or the financial impacts.Insurance is a prime risk management tool which defines risk as „a preloss exercise reflecting an organization‟s post loss goals‟. The main purpose of risk management is to minimise losses and protect people. Insurance is an easily affordable loss prevention technique.Insurance acts as contractual transfer for risks. Insurance is an appropriate management tool when the amount of loss is low and amount of potential loss is high. For smaller and medium sized organizations, insurance acts as risk management tool. In certain cases, larger-sized organizations may also need the services of insurance companies for loss settlements. Even after insuring a loss procedure, risk manager faces some problems. Hence risk managers need to choose an appropriate insurance company, policy and agent. Increasingly, insurance is a prime management tool which resolves the liability limitations. For example, if a production process requires chemical components, then special toxic risk insurance is needed.