• How-to

If you have insurance, other people will bear the cost of unforeseen and detrimental chance events which may pose a threat to your business. Otherwise, you will have to bear the cost of such chance events. So, how do you decide when to take insurance and when to self insure? Let me start with a few examples to make a salient point.

Self insurance vs insurance
Say, your income is Rs.15 lakh a year. You are unwell, end up staying in hospital, and the cost is Rs.20,000. Should you have insured against such an event? Well, you can easily handle the Rs.20,000 burden. Now, say you are a gardener with a family and monthly income of Rs.10,000. Now, if you are hospitalized and cough up Rs.20,000, it will not be so easy to pay up this amount. You better have insurance, else it will damage your life.

The point is, insurance should be taken for eventualities that you may find hard to handle. Now, look around and see which these risks are, or bring in a professional broker to assess your business to check the risks. For impacts you think are big and beyond your means, get insured. Let’s look at a typical business and check its assets as well as risks.

Assets: Things that are of value
1. Key employees
2. Major contracts
3. Major equipment (computers, reactors, etc, whatever runs your business)
4. Materials (in stock and transit)
5. Intellectual property
6. Trust: Promises made by your employees can be trusted and that is why other entities deal with you.

Risks: What can go wrong
1.Key employees (die, leave). Try key man insurance. This should only be taken for someone who is irreplaceable.
2. Major contracts (lost to competition, you are unable to deliver owing to reasons beyond control etc). There are insurance options for multiple eventualities here.
3. Equipment (breaks down, catches fire, is stolen etc). Basic fire, theft or marine insurance if in transit, also applies to next point.
4. Materials (fire, theft, accident in transit)
5. Intellectual property is lost, stolen etc
6. Your employees make a promise, which now costs you money to honor, or employees make a mistake. Try professional indemnity insurance.

Remember to get a professional to assess your business and report all risks he can spot. With common sense review it, and discuss additions. Assess likely impact and classify it into four categories: Likely-unlikely, and high impact-low impact. See what you can do by way of precaution. For example, do not keep key equipment next to an acid tank. Insure high impact ones, especially the less-likely ones, as this can happen. In case of the low impact ones, try self-insurance.

©Entrepreneur May 2011

Yashish Dahiya is CEO, Policybazaar.com.

Tags:
business, contracts, employees, equipment, income, insurance, PolicyBazaar, property, risk, yashish dahiya