Finance: Business Insurance
To begin exploring the concepts of business insurance, we need to look back at the potential risks a company has. Risks are uncertainties that a financial goal will not be met or actions that may conclude in financial loss. A company contains both internal and external risks during its lifetime. External risks in business include funding, regulatory affairs, competition partnerships, environment, and brand reputation. As for internal risks, this includes financial management, legal compliance, and corporate governance. Other factors can also contribute to risk, such as breaking laws. Breaking laws is an example of criminal risks; these criminal risks have consequences and ultimately financial loss.
Risks are obviously bad for a company or individual, but why are they dangerous? Risks are dangerous because they limit a business's or an individual's monetary goals. It is very expensive to build a business from the ground up. At some point, in any company's life, a company will need to seek outside capital to grow. This requires the need for funding and creates a financial risk to both the business and to any investors or stakeholders invested in the company. Risks such as credit risks limit the amount a business can borrow, putting a company in an unstable situation. In addition, other losses such as accidents and natural disasters only damages an organization further. But risk can be prevented or covered. Risk can be protected and controlled.
You may be asking: how does one protect oneself from risk? How does a company protect itself from risk? The answer is through business insurance. Business insurance is a contract providing financial protection against a specified loss. It is a coverage plan against random or unexpected loss. Business insurance coverage protects businesses from losses due to events that may occur during the normal course of business. However, insurance is a contract and therefore contains legal mandates that need to be followed by a business to keep the insurance intact. Insurance follows a specific legal contract or policy. A legal contract is a specific term of the agreement between the two parties. Not following legal contracts concludes in legal risks and financial loss. The insured is the person or business being covered by the business policy. The insurer is the company that assumes the risk and agrees to pay for losses covered by the policy. An issuer would assume the risks and pay when peril is declared. Some examples of perils are fires, office accidents, injuries, robberies, and natural disasters.
Not everyone can be insured with business insurance, the policyholder is the individual or organization to whom the policy is issued. Even then, the policyholder is not always insured. In order to purchase insurance, the policyholder must possess an insurable interest in the specified financial loss. Insurable interest states that the insured will suffer a financial loss if the insured event occurs. In addition, the policyholder is charged a premium or the amount paid to keep the insurance policy in force. Moreover, there needs to be an estimated amount needed to insure the insured company. The availability of insurance will help cover risks during the time of peril. The availability of insurance is solely based on the proposition that the insured can predict the number of losses that will be suffered by all of those who are insured for a particular loss in a given period of time. It is impossible for an insurance company to predict what to cover in damages in a business for a period of time. Therefore, information used in past perils across a similar business is used to determine the funds needed to insure the insured.
The accuracy of prediction regarding the number of losses that will occur among all of the business insured for a particular peril is very important. Without the ability to estimate the proper amount of losses that insurance company has to pay, the insurance company may not be able to accumulate enough money from premium to pay for all of the losses suffered and make a profit. To estimate losses, companies use the principles of statistics. Companies employ actuaries or highly trained mathematicians who gather and analyze data to determine risk factors in order to establish premium rates. Business insurance protects business and individuals against risks that retains the business or individual to reach financial goals. It helps to control financial loss and uncomfortable situations in the business. However, every type of insurance follows a legal contract which the insured and the insurer have to follow. Living a risk-free life is very important and can only be beneficial. Make sure to talk to your business or family about the insurance that's right for you.
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Dlabay, Les R., and James L. Burrow. Business Finance. Thomson South-Western, 2008.
Kagan, Julia. “Business Insurance.” Investopedia, Investopedia, 4 Dec. 2019, www.investopedia.com/terms/b/business-insurance.asp.