Page 204 - RISK Management IC 86

Risk Management

stop work for a short time or their work rate may go
slow. It might effect the morale of workers with the
consequent drop in productivity and increase and spoilt
materials.

Q3. In the ultimate analysis, purchase of insurance
cannot be dispensed with by a Corporate
Enterprise. Give reasons in support of this
statement.

Ans. Purchase of insurance cannot dispensed with by a
corporate enterprise alone. There are several factors to
be considered while purchasing insurance. If the risk
has very low loss potential, then the premium required
to cover the insurer's administration costs makes
insurance uneconomic.

In the case of risks with high frequencies of occurrence
and low loss severities, insurance becomes uneconomic
as the premium paid to insurers exceed the petty
expenses. It is when the loss experience is subject to
large fluctuations, and maximum losses exceed a tolerable
level, then it is worth purchasing insurance. Tolerable
level depends on the organisation's financial status,
wealth, cash flow, liquidity etc.

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