What is the Concept of Risk when should we insure?

Answer 1

Note that when we speak about a risk, we are not referring to a loss that has actually been suffered but a loss that is likely to occur. It is thus an expected loss. The cost of this expected loss (which is the same as the cost of the risk) is the product of two factors
The probability that the peril being insured against may happen, leading to the loss. Probability always lies between 0 and 1, where 0 means impossibility of loss occurring and 1 means certainty of it happening.
The impact or severity which is the amount of loss that may be suffered as a result of a loss. A mild earthquake may cause little or no loss whereas a major earthquake may result in widespread losses and hence more severe.
The cost of risk would increase in direct proportion with both probability and amount of loss.
When deciding whether to insure or not, one needs to weigh the cost of transferring the risk against the cost of oneself bearing the loss that may arise. The cost of transferring the risk is the insurance premium - driven by the two factors mentioned in the previous paragraphs.
The best situations for insurance would be where the probability is very low but the loss impact could be very high. In such instances, the cost of transferring the risk through its insurance [the premium] would be much lower while the cost of bearing it oneself would be very high.