Index Insurance Forum

Risk Transfer and Capital Adequacy – Manual 5

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Agricultural production is inherently subject to a variety of risks because management decisions or states-of-nature often generate future outcomes (either favorable or unfavorable) that cannot be predicted with certainty. The variability of these outcomes represents risk. Some risks are managed through production and fi nancial decision-making, while others are simply accepted as business expenses. In addition, some risks can be managed through a variety of contractual and insurancerelated

On average, financial activities with low levels of risk are associated with lower potential returns. Low-risk investment actions tend to generate very small returns. Conversely, high levels of fi nancial risk are generally associated with high expected returns. However, the risk/return tradeoff does not mean that accepting high levels of risk guarantees higher returns.