The insurance system finances such risks by breaking up the risks into smaller parts and transferring these parts to multiple risk bearers. There is an obvious parallel here with the issuance of public securities. Such securities, whether equity or debt, represent large risks, which are spread among a large number of individual investors. Let's look at a specific example of a large enterprise, a supertanker. Let us assume that a new corporation is considering building the supertanker and then operating it as an ongoing business.
Numerous investors purchase the stock and the business is financed.
Thus the risks of the business have been transferred to multiple risk bearers. Here is where something peculiar happens. One of the key risks that the business faces is that the supertanker may be lost at sea. In most cases, the investors will not be exposed to this risk, since the corporation will have covered this risk with an insurance policy. We see a similar process with many debt instruments.