• Insights

It is very critical for any business to determine its insurance need and protect the downside in case of contingencies. Businesses by their very nature are risky. There are several factors involved in a certain business which work together to augment the scales and profitability of the business. The factors are—entrepreneurship and strategies adopted, demand of the product, competition within the industry and alternative product industry, economic and business cycles, availability of resources, which include cheap capital, trained manpower etc.

Many of these factors and parameters are within the ambit of business risk and cannot be insured against. Certain other contingency risks which may be common to all businesses or may be business specific and have a low probability of occurrence can be insured. These contingent events, if occur, have the ability to seriously affect the bottom line of the business entity, apart from having social and reputational ramifications. Lack of proper planning with respect to such insurance can affect the continuity of the business in case of adverse events.

There are various types of insurances in the realm of General Insurance which apply to businesses, depending on their nature and area of operation. For a business entity, just protecting its assets and constituents against unnatural or catastrophic events is not enough. This may incidentally also be enforced by the regulations as well as by business associates, vendors and clients. Many other things go with the business hygiene and have a social angle as well. This is in the form of various liability insurance which may also be mandated by law.

Some other types of insurance may be necessary for a business, depending on its nature of operations such us exports and imports, inland transit of goods, transportation, excavation, dealing in hazardous substances and its movement, etc.

One of these types is Business Property Coverage Insurance which helps one recover the cost of replacement or reinstatement and thus protect losses to assets and property due to unnatural events. It also covers the loss of cash flow, income or profits that a business incurs after a disaster while its facility is being rebuilt. One can also cover unpaid receivables due to protracted default, insolvency or bankruptcy of the counterparty and compensate a fixed sum against financial losses arising from the death or extended incapacity of a key member within the term of the key member’s usefulness to the business.

The other type—Liability Coverage—helps enable a system of automatic compensation for loss of wages, treatment for injuries, hazards, accidents at the work place or in transit and to avoid litigation as a result thereof, to provide protection to directors and officers against their personal civil liability, and to professionals against legal liability arising due to negligence in the exercise of their duties. This also helps cover reimbursement of medical and hospitalization expenses liability up to certain limits.

To cover the operational losses arising from break down due to unnatural events related to a business, to cover the risk of loss or damage to cargo in transportation and to cover the risk of business loss due to riots, strikes, terrorist activities in some affected areas, one must go for business-specific operational loss cover.

However, a few types of insurance may overlap these categories as per the specific nature of business. It may be kept in mind that these covers are available for contingent events only. However, if such events become too frequent or predictable, the premium entailed itself would defy taking such insurance. Much depends on the claim ratio in a kind of business or across businesses which impacts premium amounts charged by individual insurers as well as the industry at large. Qualified appraisers are usually trusted for ascertaining the need and quantum of insurance for various businesses. They ensure against underinsurance and see to it that the financial and reputational interests of the business are appropriately protected along with safeguarding the interests of society. Reinsurance is an important metric in the General insurance industry whereby the excess risk of insurers themselves is distributed and contained while facilitating risk protection over a larger universe.

The General Insurance industry plays an important role in the development of economy. It helps in affording speedy institutional assistance in the restoration of assets and property of the businesses due to a perilous event. It facilitates businesses in the country with the management of risk factors not related to business as well as those factors which correspond to certain perils associated with particular business activities.

The views expressed here are personal and do not necessarily represent those of the organization.

Ranjeet S Mudholkar is Vice Chairman and Chief Executive Officer, Financial Planning Standards Board India. The views expressed here are personal and do not necessarily represent that of the organization. FPSB India is the sole marks licensing authority for the CFP marks in India, through agreement with US-based FPSB Ltd.

©Entrepreneur October 2011

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business, coverage, Entrepreneurship, insurance, planning, product, Ranjeet S. Mudholkar