Example2
Industry is in exactly the same position.
The managing director of a company knows that his firm is exposed to a whole range of risks; we have looked at many of them in the previous chapter.
He does not know if any of them will materialise and if they do, what the cost is likely to be.
How will he be able to manage his business?
If he has a loss of some kind, he will have to recover the cost from his customers by increasing the price of the product he manufactures, or the service he provides.
What cost will he pass on?
He has no idea whether he will have a loss or not, or the cost of any loss which might occur.
The function that insurance performs in this situation is to be a risk transfer mechanism.