For most nonprofits, purchasing insurance is an essential component of managing and financing risk. Purchasing insurance is not, however, synonymous with practicing risk management. Risk management encompasses a wide range of activities related to anticipating, avoiding, controlling, and financing risk. One way to look at the concept of insurance is to define it in terms of a trade. Insurance involves trading the uncertainty of a large financial loss for the certainty of a fixed premium.
Most nonprofits are unable to maintain a reserve fund adequate to pay for potential claims.
Insurance provides an affordable and appropriate mechanism for financing covered losses. The types of coverages appropriate for a specific organization depend on the exposures facing that organization. It is impossible to say, therefore, that all nonprofits should carry certain coverages. Although most nonprofits go directly to the purchasing decision, a nonprofit should undertake a careful review of its exposures before deciding what coverages to buy. Various types of insurance are available to cover these claims.