Insurance and Business work hand in hand because business is surrounded by risks and Insurance addresses the risks surrounding businesses. People view Insurance as an expense rather than a risk transfer mechanism. While the benefits of insurance to business is so glaring, many are still indifferent about it.
This post exists to end what seems to be the bias in people’s minds and elucidate to them the benefits of insurance. The benefits of insurance to your business are many.
Many times and over the following question comes from people to us insurance experts: “Why will I pay a premium for a one-year policy and at the end of that year, I sustain no loss but the insurer never gives me my money back?”
In general insurance business and some Life Assurance Policies, premium payment is once a year. And at the end of the year if the claim does not crystallize the client is not paid anything.
This is how the general insurance business operates. You should be aware that you did not buy Life Insurance with savings options. This means that once your policy expires at the end of the 12th month and no loss occurred there is no payout.
Insurance is a risk transfer mechanism based on the law of large numbers and probability. Insurers collect the money of many and put them in a pool to insure a homogeneous risk.
During the period of the policy, it is not possible for everyone to sustain losses. At least from the group only a fraction (say 30%) would have claims.
The remaining 70% who also contributed to the pool will have their money used to settle those who came for the claim.
Any balance becomes underwriting profit to the insurer. You can now see that it is an injustice to contribute to the pool and seek to withdraw your contribution after expiry. This negates the principles of insurance.
What is Insurance?
Insurance is a risk transfer mechanism where one person called the insured transfer his risk to another called the insurer in exchange for consideration called premium. The insurer is under obligation to pay the insured if he sustain a loss. Insurance is a silent product. You don’t know what you have until there is a loss (claim). It is not like opening a bank account that you go from time to time to withdraw your money or admire how much money is in your account. It is a totally different ball game. Your policy is only tested when there is a claim. You might be looking at your policy document as an insignificant document but wait until you have a claim. Provided the policy is still running and premium fully paid you get your claim settled pronto.
What is the usefulness of Insurance to Business?
The usefulness of Insurance to businesses are numerous. For want of time and space we put down these three points:
1. Preservation Of The Bottom-Line
To an entrepreneur the word bottom-line is the most important word. It ensures he get paid, it ensures he is there for years to come, it ensures his doors remained opened for business year in year our. Bottom-line is the profit made during business transactions. If there is profit, the entrepreneur is guaranteed of another year of smooth business operation. Yet, if not then it would be a turbulent year.
How does Insurance assist in preserving the bottom-line?
The entrepreneur confronts business risks daily, weekly, monthly and yearly. It would interest you to know that any of the risks can become a claim. The entrepreneur would be in serious trouble if the claim eats into his bottom line.
For example, if fire gut the main factory of a manufacturing company the outcome will vary. First, if the entrepreneur has insurance he would just call on them. They will assess the claim, exchange correspondences and documents. After couple of weeks or months, the claim would be fully settled. The entrepreneur would re-build the factory and move on. The money to re-build will not come from his over-stretched budget. It would come from the insurance company. Furthermore, during the period of no business because of the fire if he has Consequential Loss Insurance he would get compensated. All his Fixed Cost when the business was down will get paid until the factory is up and running again.
On the other hand, if he has no insurance, he would have to dip his hands into his pocket to fix the damages caused by the fire. It is not going to be an easy task at all, it would affect his funds and savings, it would erode his profit and so on. His strategy would be to pass on the expenses to his customer by increasing the price of his products. That can spell doom on his competitive position in the market. Many customers would leave him for his competitors’ due to the price change. Save yourself the heartache, get your insurance policy now.
2. Keeps Businesses Running
From the example in 1 above, the factory that got engulfed in fire kept running. Have you ever ask yourself why banks branches still open after many robberies? The bank never shakes but rather keeps waxing great. The truth is that all these banks have Money Insurance and other insurances. If there is a robbery, all the bank need to do is notify his Insurance broker or Insurance company and the rest would be history.
There are factories in this country that have folded up due to lack of Fire Insurance. Many of them could not bound back after major fire incidents. It is some how hard and capital intensive to make provision for disaster. The best thing to do is to insure the risk.
3. Assist In Proper Management Of Business Risks
There are many risks confronting businesses daily. To counter them you need adequate insurance. For every risk, there is an insurance policy. Below is a list of business risks and insurance policy that can help combat them:
Insurance gives peace of mind to the policyholder. Government agencies need more and more companies to have some form of insurance as a rule for accreditation. (Read Compulsory Insurance In Nigeria for more). To practice as a professional (e.g. Legal, Doctor, Accountants etc) in many fields you need Professional Indemnity Policy. To a large extent you can now see how useful insurance is to your business.
Do not cheat yourself, do the right thing today.