Principles of Risk Management and Insurance, 13th Edition

Insurance and Hedging Compared

In Chapter 1, we discussed the concept of hedging, by which risk can be transferred to a speculator through the purchase of a futures contract. An insurance contract, however, is not the same thing as hedging. Although both techniques are similar in that risk is transferred by a contract, and no new risk is created, there are some important differences between them. First, an insurance transaction typically involves the transfer of pure risks because the characteristics of an insurable risk generally can be met. However, hedging is a technique for handling speculative risks that may be uninsurable, such as protection against a decline in the price of agricultural products and raw materials.

A second difference between ...