Severe Financial Crises and Fundamental Reforms: The Benefits of Risk-Sharing - A Comment الأزمات المالية الحادة والإصلاحات الأساسية: فوائد تقاسم المخاطر - تعليق

Risk is the probability of an unpleasant event that inflicts a loss quantifiable in terms of money (dollars). It is an integral part of life, and every individual faces some amount of risk, in particular financial risk, in his day to day activities. The risky event could be a health problem resulting in medical bills, a car accident resulting in repair and compensation costs, a flood resulting in loss of lives and goods, etc. People, on average, avoid bearing risk as it disturbs the pattern of their lives and makes them unable to maintain the standard of living at par with the level before the happening of the risky event. Hence, people in societies with developed financial systems generally buy insurance to maintain a smooth level of consumption. On the other hand, people in societies with weak financial systems mostly rely on family and borrowing or past savings to meet the consequences of an unpleasant event. However, all types of risks; such as financial losses associated with earthquake, floods, storms, macroeconomic factors, etc., are not insurable. In this regard, the responsibility of the society is to do two things. One is before, and other is after the risky incident. Pre-incidents measures include steps for reducing the probability of risky incidents; for example, plantation at a broader level to avoid floods. Post-incidents measures include institutional arrangements for distributing the burden of financial losses across people and thus minimize the sorrows of sufferers. --