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Bet against yourself: integrating insurance and entrepreneurship

Published online by Cambridge University Press:  25 May 2021

Marian Eabrasu Open the ORCID record for Marian Eabrasu [Opens in a new window]
Marian Eabrasu*
Affiliation:
EM Normandie Business School, Métis Lab, Paris, France
*
Corresponding author. Email: [email protected]
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Abstract

This paper revisits and fine-tunes a spin-off from Knight's (1921, Risk, Uncertainty and Profit) influential distinction between risk (‘probability of unknown events’) and uncertainty (‘unquantifiable randomness’): the contrast between actuarial institutions and entrepreneurship. It contends that this opposition is not exclusive and argues that the act of insurance does not automatically reduce entrepreneurial profits. To maintain this claim, the paper emphasizes hedging and, more specifically, draws on an innovative actuarial scheme – parametric (or index-based) insurance – which, unlike indemnity-based insurance, does not rely on a damage assessment but indemnifies the policyholder according to the variation of an index. This argument sheds new light on the function habitually assigned to actuarial institutions, amends the theory of entrepreneurial profits, and integrates hedging within entrepreneurial judgment.

Keywords

Hedgingindex-based insuranceKnightriskuncertaintyB5B53D8G22L26
Type
Research Article
Information
Journal of Institutional Economics , Volume 17 , Special Issue 6: Special Issue on the Centenary of Frank H. Knight's Risk, Uncertainty, and Profit , December 2021 , pp. 959 - 972
Copyright
Copyright © The Author(s), 2021. Published by Cambridge University Press on behalf of Millennium Economics Ltd.

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