Final answer:
Risk refers to the uncertainty that can impact an objective, with potential outcomes that include opportunities and threats. Insurance is a tool to manage risk by handling imperfect information and mitigating against unforeseeable adverse events with significant impact.
Step-by-step explanation:
The concept of risk pertains to the uncertainty that affects an objective, where outcomes can range from opportunities to losses and threats. Economic risks, for instance, are events over which individuals have little control, such as a country experiencing a natural disaster, war, or massive unemployment. These risks are important as individuals need assurance of having their needs met for themselves and their families. When it comes to how insurance works, it is a method of managing risk which involves dealing with imperfect information. Insurers cannot predict with certainty who will be involved in a car accident, fall ill, or die within a certain period. This is due to various factors, including individuals' characteristics and choices that affect risk levels, as well as the randomness of events. Although insurance companies use statistics and patterns to estimate risks, there is always an inherent uncertainty because unexpected events occur. This is why people tend to purchase insurance; it is a means to mitigate low-probability but potentially devastating events.