How is insurance a trade-off between risk and cost?

Risk is involved in all types of investment the higher risk yields higher returns while lower risk yields lower returns. The trade off which the investor faces in making investment decisions is the risk return trade off.

In insurance the cost of risk includes the expected losses which are uncertain. The trade off which is provided by insurance can be direct and indirect losses, internal risk reduction and residual uncertainty. Insurance reduces the expected losses and eliminate the risk of loss by providing cover the cost of which depends on the nature of the risk.