Why does it make sense for a company to purchase insurance?

Purchasing insurance decreases the likelihood of having to raise costly external costly. Having to raise costly capital could cause a firm to forgo new investment and profitable projects, or cause new projects to be unprofitable. Insurance prevents the firm form having to use internal funds to pay for losses. It also decreases the likelihood of financial distress which affects the conditions at which claimants contract with the firm. Because the firm would have to pay claimants for risk, it is cheaper to purchase insurance to cover those risks.