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Businesses often need to take chances in order to
grow and flourish, but that does not mean they should
take unnecessary risks. The right insurance is crucial,
and risk control should be concerned with how to prevent
or reduce risks and controlling the losses when they
do occur.
Such measures include risk avoidance, the segregation
and diversification of items prone to risk, loss prevention,
loss reduction, and the non-insurance transfer of
risk, which might include using contracts to transfer
risks to another party, as well as outsourcing risky
processes.
Not all risks can be avoided
A thorough risk survey will reveal what can be done
to control risk and its impact, while also exposing
risks that cannot be totally prevented. The best way
to handle these would be either to retain them if
the financial impact is bearable, or insure them if
the financial impact is great.
The key thing in considering insurance is to focus
on the financial impact and not the probability of
occurrence. In other words, improbable risk should
still be insured if the occurrence has a severe financial
impact – after all, insurance premiums already
factor in probability.
Most businesses have property insurance in the event
of a fire or other extraneous perils, plus cover for
theft, material damage and consequential loss. But
insurance could also cover employee liabilities like
workmen compensation and common law cover, while public
liability insurance would cover the risk of injury
or death to a third party, or damage to the property
of a third party. Other types of insurance deal with
professional indemnity, product liability, and the
liability of directors and officers.
Common mistakes
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Insuring physical property but not the consequential
loss or the loss of profits, which is often much
larger than the destruction of physical assets. |
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Neglecting to insure against the wrongful acts
of directors and officers. This is a form of specialised
liability. |
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A lack of ‘key man’ insurance to insure
business continuity, or insurance to fund a buy-and-sell
agreement between partners and shareholders. |
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Insurance cover often isn’t big enough
– businesses should keep track of the upward
trend in claims amounts and the liability awards
by the courts. |
THIS ARTICLE IS REPRODUCED COURTESY OF SMART INVESTOR
MAGAZINE
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Market Matters 
